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 for 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. 22 OVERVIEW Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. As of November 30, 2021, we owned and managed on behalf of our joint ventures 264 aircraft leased to 79 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 November 30, 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 $6.73 billion compared to $6.69 billion at February 28, 2021. Our total revenues, net income (loss) and Adjusted EBITDA for the three and nine months ended November 30, 2021 were $191.5 million and $514.9 million, $(62.4) million and $(62.4) million, and $174.1 million and $519.9 million, 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 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 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 $87.2 million. 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, $81.8 million 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, the recognition of lease rental revenue for certain customers may be done 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 23 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 allowed amount of our unsecured claims was approved by the Bankruptcy Court. Proceeds from the sales of these claims in the amount of $55.2 million were received during the second quarter of 2021 and recognized in Other income (expense). 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. We believe that we have sufficient liquidity to meet our contractual obligations over the next twelve months and as of January 1, 2022, total liquidity of $2.1 billion includes $1.4 billion of undrawn credit facilities, $0.2 billion of unrestricted cash, $0.1 billion of contracted asset sales and $0.4 billion of projected operating cash flows through December 31, 2022. As of November 30, 2021, we have commitments to acquire 27 aircraft for $964.3 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 November 30, 2021, the Company had thirteen off-lease aircraft and twelve aircraft with scheduled lease expirations in fiscal 2021. As of January 7, 2022, of these 25 aircraft, we have ten aircraft, which account for 3.8% of our net book value at November 30, 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 November 30, 2021, specified below: • 2022: 16 aircraft, representing 4%; • 2023: 42 aircraft, representing 12%; • 2024: 50 aircraft, representing 19%; and • 2025: 31 aircraft, representing 14%. 24 Acquisitions and Sales During the nine months ended November 30, 2021, we acquired twelve aircraft for $514.3 million. As of January 7, 2022, we acquired three additional aircraft. At November 30, 2021, we had commitments to acquire 27 aircraft for $964.3 million. Of this amount, $183.1 million represents commitments for the remainder of fiscal year 2021. During the nine months ended November 30, 2021, we sold seven aircraft and other flight equipment for net proceeds of $127.6 million, and recognized net gains on sales of $17.9 million. As of January 7, 2022, we have sold three additional aircraft. The following table sets forth certain information with respect to the aircraft owned by us as of November 30, 2021: AIRCASTLE AIRCRAFT INFORMATION (dollars in millions) Owned Aircraft As of November 30, 2021 (1) As of November 30, 2020 (1) Net Book Value of Flight Equipment $ 6,734 $ 6,979 Net Book Value of Unencumbered Flight Equipment $ 5,619 $ 5,406 Number of Aircraft 255 260 Number of Unencumbered Aircraft 223 224 Number of Lessees 79 80 Number of Countries 43 45 Weighted Average Age (years) (2) 10.6 10.5 Weighted Average Remaining Lease Term (years) (2) 4.8 4.3 Weighted Average Fleet Utilization during the three months ended November 30, 2021 and 2020 (3) 94.0 % 94.0 % Weighted Average Fleet Utilization during the nine months ended November 30, 2021 and 2020 (3) 93.7 % 94.8 % Portfolio Yield for the three months ended November 30, 2021 and 2020 (4) 9.7 % 8.4 % Portfolio Yield for the nine months ended November 30, 2021 and 2020 (4) 8.9 % 9.1 % Managed Aircraft on behalf of Joint Venture Net Book Value of Flight Equipment $ 302 $ 315 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 and nine months ended November 30, 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 leases. 25 PORTFOLIO DIVERSIFICATION Owned Aircraft as of November 30, 2021 Owned Aircraft as of November 30, 2020 Number of Aircraft % of Net Book Value (1) Number of Aircraft % of Net Book Value (1) Aircraft Type Passenger: Narrow-body - new technology (2) 23 15 % 13 9 % Narrow-body - current technology 206 65 % 220 68 % Wide-body - current technology 22 16 % 23 19 % Total Passenger 251 96 % 256 96 % Freighter - current technology 4 4 % 4 4 % Total 255 100 % 260 100 % Manufacturer Airbus 168 64 % 176 65 % Boeing 79 33 % 79 33 % Embraer 8 3 % 5 2 % Total 255 100 % 260 100 % Regional Diversification Asia and Pacific 74 32 % 80 37 % Europe 99 31 % 99 28 % Middle East and Africa 10 4 % 11 4 % North America 35 16 % 28 11 % South America 24 12 % 26 13 % Off-lease 13 (3) 5 % 16 (4) 7 % Total 255 100 % 260 100 % (1) Calculated using net book value at period end. (2) Includes Airbus A320-200neo, Boeing 737-MAX8 and Embraer E2 aircraft. (3) 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. (4) Of the sixteen off-lease aircraft at November 30, 2020, we have three wide-body aircraft which we are currently marketing for lease or sale. 26 The top ten customers for aircraft we owned at November 30, 2021, are as follows: Customer Country Percent of Net Book Value Number of Aircraft IndiGo India 7.4% 11 LATAM (1) Chile 7.3% 13 Air Canada Canada 3.5% 5 Iberia Spain 3.4% 14 American Airlines United States 3.4% 8 Lion Air Indonesia 3.3% 7 easyJet United Kingdom 3.3% 18 Frontier Airlines United States 3.0% 4 Aerolineas Argentinas Argentina 2.9% 5 AirBridgeCargo (2) Russia 2.4% 2 Total top ten customers 39.9% 87 All other customers 60.1% 168 Total all customers 100.0% 255 (1) LATAM filed for Chapter 11 in May 2020. We have signed restructured leases for all thirteen of the LATAM aircraft, subject only to LATAM emerging from the Chapter 11 process. (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 $2.09 billion in equity capital from private and public investors. We also raised $18.92 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. 27 RESULTS OF OPERATIONS Comparison of the three months ended November 30, 2021 to the three months ended November 30, 2020: Three Months Ended November 30, 2021 2020 (Dollars in thousands) Revenues: Lease rental revenue $ 156,088 $ 139,493 Direct financing and sales-type lease revenue 2,724 4,839 Amortization of lease premiums, discounts and incentives (8,867) (5,384) Maintenance revenue 33,510 24,843 Total lease revenue 183,455 163,791 Gain on sale of flight equipment 7,420 12,951 Other revenue 605 4,169 Total revenues 191,480 180,911 Operating expenses: Depreciation 84,526 86,845 Interest, net 50,515 59,945 Selling, general and administrative 17,141 14,403 Provision for credit losses 958 742 Impairment of flight equipment 69,111 9,867 Maintenance and other costs 8,660 4,207 Total operating expenses 230,911 176,009 Other income (expense): Loss on extinguishment of debt — (43) Merger expenses — (450) Other 63 — Total other income (expense) 63 (493) Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investments (39,368) 4,409 Income tax provision 23,504 2,269 Earnings of unconsolidated equity method investments, net of tax 465 572 Net income (loss) $ (62,407) $ 2,712 Revenues Total revenues increased by $10.6 million for the three months ended November 30, 2021 as compared to the three months ended November 30, 2020. Lease rental revenue increased by $16.6 million as a result of: • a $20.8 million increase related to certain customers which lease rental revenue was recognized using a cash basis of accounting rather than an accrual method – see Note 1 regarding our lease revenue recognition policy. The three months ended November 30, 2020 included a higher number of customers for which lease rental revenue was recognized using a cash basis of accounting; and • a $9.3 million increase in revenue related to fourteen aircraft purchased since September 1, 2020. These increases were partially offset by decreases in revenue of $7.3 million due to the sale of fourteen aircraft since September 1, 2020 and $6.2 million related to lease extensions, amendments, transitions and other changes. 28 Direct financing and sales-type lease revenue decreased $2.1 million for the three months ended November 30, 2021 as compared to the three months ended November 30, 2020, primarily attributable to the reclassification of six aircraft to operating leases and the early lease termination of one aircraft. Amortization of lease premiums, discounts and lease incentives consisted of the following: Three Months Ended November 30, 2021 2020 (Dollars in thousands) Amortization of lease premiums $ (5,724) $ (3,353) Amortization of lease discounts 213 262 Amortization of lease incentives (3,356) (2,293) Amortization of lease premiums, discounts and incentives $ (8,867) $ (5,384) The amortization of lease premiums increased $2.4 million primarily due to the write-off of unamortized lease premiums resulting from early lease terminations. The amortization of lease incentives increased $1.1 million primarily due to the transition of aircraft to new lessees. Maintenance revenue. For the three months ended November 30, 2021, we recorded $33.5 million of maintenance revenue, comprised primarily of $28.9 million related to the early lease terminations of four narrow-body and one wide-body aircraft and $4.2 million related to the scheduled lease expirations of four narrow-body aircraft. For the three months ended November 30, 2020, we recorded $24.8 million of maintenance revenue, of which $18.2 million related to the scheduled lease expirations of six narrow-body aircraft. Gain on sale of flight equipment decreased $5.5 million to $7.4 million for the three months ended November 30, 2021 as compared to $13.0 million for the three months ended November 30, 2020. We sold three aircraft in each of the three month periods ended November 30, 2021 and 2020. Other revenue decreased $3.6 million to $0.6 million for the three months ended November 30, 2021 as compared to $4.2 million for the three months ended November 30, 2020. The three months ended November 30, 2020 included $4.0 million of security deposits recognized into revenue primarily related to the early lease terminations of two narrow-body aircraft. Operating expenses Total operating expenses increased by $54.9 million for the three months ended November 30, 2021 as compared to the three months ended November 30, 2020. Depreciation expense decreased by $2.3 million primarily attributable to a decrease of $6.2 million resulting from fourteen aircraft sold since September 1, 2020 and lower depreciation on aircraft subject to impairment charges. This was partially offset by higher depreciation of $4.1 million related to fourteen aircraft acquired since September 1, 2020. Interest, net consisted of the following: Three Months Ended November 30, 2021 2020 (Dollars in thousands) Interest on borrowings and other liabilities $ 47,152 $ 56,087 Amortization of deferred financing fees and debt discount 4,099 3,929 Interest expense 51,251 60,016 Less: Interest income (448) (71) Less: Capitalized interest (288) — Interest, net $ 50,515 $ 59,945 29 Interest, net decreased $9.4 million due to a lower weighted average debt outstanding and a lower average cost of borrowing. Selling, general and administrative expenses for the three months ended November 30, 2021 increased $2.7 million as compared to the three months ended November 30, 2020 primarily due to higher personnel and travel costs. Impairment of aircraft. During the three months ended November 30, 2021, the Company recorded transactional impairment charges totaling $69.1 million 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 $24.3 million of maintenance revenue for these three aircraft. During the three months ended November 30, 2020, the Company recorded transactional impairment charges totaling $9.9 million, primarily related to the scheduled lease expirations of two narrow-body aircraft. The Company recognized $15.2 million of maintenance revenue for these two aircraft. Maintenance and other costs were $8.7 million for the three months ended November 30, 2021, an increase of $4.5 million as compared to the three months ended November 30, 2020. The increase is primarily attributable to aircraft that have transitioned or will transition to new lessees as a result of scheduled lease expirations or related to aircraft that returned due to lease terminations. Income tax provision Our income tax provision for the three months ended November 30, 2021 and 2020 was $23.5 million and $2.3 million, respectively. The increase in our income tax provision of $21.2 million was primarily attributable to changes in the mix of pre-tax book income/(loss) in Bermuda, Ireland and the United States. The three months ended November 30, 2021 included certain impairment charges which were recorded in a low tax jurisdiction. Further, the three months ended November 30, 2020 included discrete items related to stock compensation and the impact of the CARES Act. 30 RESULTS OF OPERATIONS Comparison of the nine months ended November 30, 2021 to the nine months ended November 30, 2020: Nine Months Ended November 30, 2021 2020 (Dollars in thousands) Revenues: Lease rental revenue $ 425,802 $ 473,566 Direct financing and sales-type lease revenue 8,377 14,903 Amortization of lease premiums, discounts and incentives (20,026) (17,360) Maintenance revenue 81,204 121,508 Total lease revenue 495,357 592,617 Gain on sale of flight equipment 17,944 24,181 Other revenue 1,641 17,962 Total revenues 514,942 634,760 Operating expenses: Depreciation 250,308 262,806 Interest, net 163,965 173,996 Selling, general and administrative 48,714 70,897 Provision for credit losses 970 5,255 Impairment of flight equipment 110,926 299,551 Maintenance and other costs 24,275 14,044 Total operating expenses 599,158 826,549 Other income (expense): Loss on extinguishment of debt (14,156) (108) Merger expenses — (32,492) Other 57,682 (191) Total other income (expense) 43,526 (32,791) Loss from continuing operations before income taxes and earnings of unconsolidated equity method investments (40,690) (224,580) Income tax provision 22,877 14,738 Earnings of unconsolidated equity method investments, net of tax 1,210 1,978 Net loss $ (62,357) $ (237,340) 31 Revenues Total revenues decreased $119.8 million for the nine months ended November 30, 2021 as compared to the nine months ended November 30, 2020. Lease rental revenue decreased by $47.8 million as a result of: • a $27.9 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 $21.6 million decrease related to the sale of fifteen aircraft since March 1, 2020; and • a $15.0 million decrease due to lease extensions, amendments, transitions and other changes. These decreases were partially offset by a $16.7 million increase in revenue related to seventeen aircraft purchased since March 1, 2020. Direct financing and sales-type lease revenue decreased $6.5 million for the nine months ended November 30, 2021 as compared to the nine months ended November 30, 2020, primarily attributable to the early lease terminations of eight aircraft and the reclassification of seven aircraft to operating leases. Amortization of lease premiums, discounts and lease incentives : Nine Months Ended November 30, 2021 2020 (Dollars in thousands) Amortization of lease premiums $ (12,224) $ (11,819) Amortization of lease discounts 671 810 Amortization of lease incentives (8,473) (6,351) Amortization of lease premiums, discounts and incentives $ (20,026) $ (17,360) The amortization of lease incentives increased $2.1 million primarily due to the transition of aircraft to new lessees. Maintenance revenue . For the nine months ended November 30, 2021, we recorded $81.2 million of maintenance revenue, comprised primarily of $53.7 million related to the early lease terminations of six narrow-body and one wide-body aircraft and $20.5 million related to the scheduled lease expirations of six narrow-body aircraft. In addition, we recorded $5.8 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 nine months ended November 30, 2020, we recorded $121.5 million of maintenance revenue, comprised primarily of $66.3 million related to the early lease terminations of fifteen narrow-body aircraft and $54.5 million related to the scheduled lease expirations of nine narrow-body and one wide-body aircraft. Gain on sale of flight equipment decreased $6.2 million to $17.9 million for the nine months ended November 30, 2021 as compared to $24.2 million for the nine months ended November 30, 2020. During the nine months ended November 30, 2021, we sold seven aircraft as compared to the sale of six aircraft during the nine months ended November 30, 2020. Gain on sale for the nine months ended November 30, 2020 includes the receipt of insurance proceeds for one aircraft which was disposed. Other revenue decreased $16.3 million to $1.6 million for the nine months ended November 30, 2021 as compared to $18.0 million for the nine months ended November 30, 2020. The nine months ended November 30, 2020 included $17.5 million of lease termination fees and security deposits recognized into revenue related to early lease terminations. Operating expenses Total operating expenses decreased $227.4 million for the nine months ended November 30, 2021 as compared to the nine months ended November 30, 2020. 32 Depreciation expense decreased $12.5 million primarily attributable to $19.5 million resulting from sixteen aircraft sold since March 1, 2020 and lower depreciation related to aircraft subject to aircraft impairments. This was partially offset by an increase of $8.6 million related to seventeen aircraft acquired since March 1, 2020. Interest, net consisted of the following: Nine Months Ended November 30, 2021 2020 (Dollars in thousands) Interest on borrowings and other liabilities $ 153,287 $ 163,821 Amortization of deferred financing fees and debt discount 12,483 10,642 Interest expense 165,770 174,463 Less: Interest income (1,160) (467) Less: Capitalized interest (645) — Interest, net $ 163,965 $ 173,996 Interest, net decreased $10.0 million due to a lower weighted average debt outstanding and a lower average cost of borrowing. Selling, general and administrative expenses decreased $22.2 million, primarily attributable to a decrease in share-based compensation expense of $28.0 million as a result of the completion of the Merger, partially offset by an increase in personnel costs. Provision for credit losses decreased $4.3 million for the nine months ended November 30, 2021 as compared to the nine months ended November 30, 2020. The nine months ended November 30, 2020 included a higher provision for credit losses resulting from changes in estimates of lessee default probabilities and loss given default percentages for certain customers. Impairment of aircraft. During the nine months ended November 30, 2021, the Company recorded impairment charges totaling $110.9 million, of which $107.7 million were transactional impairments, primarily related to six narrow-body and one wide-body aircraft. The impairment charges resulted from early lease terminations, scheduled lease expirations and a lessee default. The Company recognized $61.4 million of maintenance revenue for these seven aircraft. During the nine months ended November 30, 2020, the Company recorded impairment charges totaling $299.6 million, of which $256.5 million were transactional impairments primarily related to thirteen narrow-body and five wide-body aircraft. The Company recognized $107.4 million 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. Maintenance and other costs were $24.3 million for the nine months ended November 30, 2021, an increase of $10.2 million as compared to the nine months ended November 30, 2020. The increase is primarily attributable to aircraft that have transitioned or will transition to new lessees as a result of scheduled lease expirations or related to aircraft that returned due to lease terminations. Other income (expense) Total other income (expense) increased $76.3 million for the nine months ended November 30, 2021 as compared to the nine months ended November 30, 2020. During the nine months ended November 30, 2021, the Company recognized $55.2 million of proceeds from the sales of unsecured claims related to the LATAM Bankruptcy into Other income (expense). This was partially offset by a $14.2 million loss on extinguishment of debt related to the early redemption in full of $500.0 million outstanding aggregate principal amount of our 5.5 % Senior Notes due 2022. The nine months ended November 30, 2020 included $32.5 million of legal and banking costs related to the Merger. Income tax provision Our income tax provision for the nine months ended November 30, 2021 and 2020 was $22.9 million and $14.7 million, respectively. The increase in our income tax provision of $8.1 million was primarily attributable to changes in the mix of pre-tax book income/(loss) in Bermuda, Ireland and the United States. The nine months ended November 30, 33 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. Aircraft Valuation Annual Recoverability Assessment We performed our annual recoverability assessment of all our aircraft during the fiscal third quarter for the nine months ended November 30, 2021. No impairments were recorded as a result of annual recoverability assessment – see Note 2 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 the estimates and related assumptions used in our recoverability assessments are appropriate, actual results could differ from those estimates. 34 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 preference 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 nine months ended November 30, 2021, we met our liquidity and capital resource needs with $271.4 million of cash flows from operations, $127.6 million of cash from the sale of aircraft and other flight equipment, and $393.3 million in net proceeds from our preference share issuance. As of November 30, 2021, the weighted-average maturity of our secured and unsecured debt financings was 3.3 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 January 7, 2022, we have agreed to defer approximately $87.2 million of lease payments with nineteen 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 provide further deferrals to certain customers to extend the deferrals we have previously granted. We may ultimately be unable to collect all the amounts we have deferred. As of November 30, 2021, we hold $72.6 million in security deposits, $499.0 million in maintenance payments and $143.1 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 January 1, 2022, total liquidity of $2.1 billion includes $1.4 billion of undrawn credit facilities, $0.2 billion of unrestricted cash, $0.1 billion of contracted asset sales and $0.4 billion of projected operating cash flows through December 31, 2022. In addition, we believe payments received from lessees and other funds generated from operations, unsecured bond offerings, borrowings secured by our 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. 35 Cash Flows Nine Months Ended November 30, 2021 2020 (Dollars in thousands) Net cash flow provided by operating activities $ 271,435 $ 124,380 Net cash flow used in investing activities (417,582) (25,352) Net cash flow (used in) provided by financing activities (155,422) 151,497 Operating Activities: The COVID-19 pandemic has severely impacted the demand for air travel, which has negatively impacted our customers’ financial performance. As a result, lease concessions have been given to many of our customers in the form of lease rental deferrals or broader lease restructurings. Our cash flow from operating activities for the nine months ended November 30, 2021 includes the repayment of certain lease deferrals granted during fiscal year 2020 at the onset of the pandemic. We expect that our collections will remain under pressure due to the impact of COVID-19. Cash flow provided by operating activities was $271.4 million and $124.4 million for the nine months ended November 30, 2021 and 2020, respectively. The increase of $147.1 million was primarily attributable to: • a $77.5 million decrease in accounts receivable and other assets, primarily due to an increase in customer collections, including the repayment of existing lease deferrals as noted above, as well as a reduction in requests for new deferrals as compared to the nine months ended November 30, 2020; • a $55.2 million increase in cash resulting from the sale of unsecured claims related to the LATAM Bankruptcy – see Note 1; • a $48.5 million increase as the nine months ended November 30, 2020 included advance lease rentals recognized into revenue primarily due to lease terminations; and • a $32.5 million increase in cash as the nine months ended November 30, 2020 included banking and legal costs resulting from the Merger. These inflows were offset by a $27.9 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 used in investing activities was $417.6 million and $25.4 million for the nine months ended November 30, 2021 and 2020, respectively. The net increase of $392.2 million was primarily attributable to a $399.5 million increase in the acquisition and improvement of flight equipment. These outflows were partially offset by a $14.0 million increase in proceeds from the sale of flight equipment. Financing Activities: Cash flow used in financing activities was $155.4 million for the nine months ended November 30, 2021 as compared to cash flow provided by financing activities of $151.5 million for the nine months ended November 30, 2020. The net decrease of $306.9 million was primarily attributable to a $733.6 million decrease in proceeds from secured and unsecured debt financings, net of repayments. These outflows were partially offset by a $393.3 million increase in net proceeds from the issuance of preference shares, a $27.0 million decrease in maintenance and security deposits returned, net of deposits received, and an $18.4 million decrease in dividends paid on common shares as a result of the Merger. 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. 36 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 $6.23 billion at November 30, 2021 from $6.82 billion at February 28, 2021, primarily due to the redemption of all of the $500.0 million outstanding aggregate principal amount of our Senior Notes Due 2022. 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 nine months ended November 30, 2021 and 2020, we incurred a total of $27.5 million and $15.1 million, respectively, of capital expenditures (including lease incentives) related to the improvement of aircraft. As of November 30, 2021, the weighted average age by net book value of our aircraft was approximately 10.6 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 in the event of a 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, such as in the event of a lessee default. 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. 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 November 30, 2021, the net book value of its nine aircraft was $301.9 million. Foreign Currency Risk and Foreign Operations At November 30, 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 nine months ended November 30, 2021, expenses, such as payroll and office costs, denominated in currencies other than the U.S. dollar aggregated approximately $13.0 million in U.S. dollar equivalents and represented 26.7% 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 nine months ended November 30, 2021 and 2020, we incurred insignificant net gains and losses on foreign currency transactions. 37 Management’s Use of EBITDA and Adjusted EBITDA We define EBITDA as income (loss) from continuing operations before income taxes, interest expense, and depreciation and amortization. We use EBITDA to assess our consolidated financial and operating performance, and we believe this non-U.S. GAAP measure is helpful in identifying trends in our performance. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals, as well as achieving optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed. EBITDA provides us with a measure of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure (primarily interest charges on our outstanding debt) and asset base (primarily depreciation and amortization) from our operating results. Accordingly, this metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure, or expenses, of the organization. EBITDA is one of the metrics used by senior management and the Board of Directors to review the consolidated financial performance of our business. We define Adjusted EBITDA as EBITDA (as defined above) further adjusted to give effect to adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes. Adjusted EBITDA is a material component of these covenants. The table below shows the reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the three and nine months ended November 30, 2021 and 2020: Three Months Ended November 30, Nine Months Ended November 30, 2021 2020 2021 2020 Net income (loss) $ (62,407) $ 2,712 $ (62,357) $ (237,340) Depreciation 84,526 86,845 250,308 262,806 Amortization of lease premiums, discounts and incentives 8,867 5,384 20,026 17,360 Interest, net 50,515 59,945 163,965 173,996 Income tax provision 23,504 2,269 22,877 14,738 EBITDA 105,005 157,155 394,819 231,560 Adjustments: Impairment of flight equipment 69,111 9,867 110,926 299,551 Loss on extinguishment of debt — 43 14,156 108 Non-cash share-based payment expense — — — 28,049 Merger related expenses (1) — 437 — 35,039 Loss on mark-to-market of interest rate derivative contracts — — — 19 Contract termination expense — — — 172 Adjusted EBITDA $ 174,116 $ 167,502 $ 519,901 $ 594,498 ______________ (1) Included $32.5 million in Other expense and $2.6 million in Selling, general and administrative expenses. 38 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.