Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 08/04/2016 16:18:18)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  _______________________________________________________________
FORM 10-Q
  _______________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016

or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            

Commission File number 001-32959
_______________________________________________________________
  AIRCASTLE LIMITED
(Exact name of registrant as specified in its charter)
  _______________________________________________________________
Bermuda
98-0444035
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
c/o Aircastle Advisor LLC
300 First Stamford Place, 5 th  Floor, Stamford, CT
06902
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code     (203) 504-1020
_______________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   þ     NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   þ     NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES   ¨     NO   þ
As of July 29, 2016 , there were 78,634,132 outstanding shares of the registrant’s common shares, par value $0.01 per share.



Aircastle Limited and Subsidiaries
Form 10-Q
Table of Contents
 
 
 
Page
No.
 
 
Item 1.
 
 
Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015
 
Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015
 
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015
 
Consolidated Statements of Cash Flows for the three and six months ended June 30, 2016 and 2015
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2


PART I. — FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Aircastle Limited and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)

 
June 30,
2016
 
December 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
493,233

 
$
155,904

Accounts receivable
4,500

 
8,566

Restricted cash and cash equivalents
51,418

 
98,137

Restricted liquidity facility collateral

 
65,000

Flight equipment held for lease, net of accumulated depreciation of $1,207,844 and $1,306,024, respectively
5,875,935

 
5,867,062

Net investment in finance and sales-type leases
291,903

 
201,211

Unconsolidated equity method investment
64,357

 
50,377

Other assets
164,529

 
123,707

Total assets
$
6,945,875

 
$
6,569,964

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Borrowings from secured financings, net of debt issuance costs
$
1,078,823

 
$
1,146,238

Borrowings from unsecured financings, net of debt issuance costs
3,283,971

 
2,894,918

Accounts payable, accrued expenses and other liabilities
135,363

 
131,058

Lease rentals received in advance
57,178

 
67,327

Liquidity facility

 
65,000

Security deposits
123,533

 
115,642

Maintenance payments
490,521

 
370,281

Total liabilities
5,169,389

 
4,790,464

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
Preference shares, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding

 

Common shares, $0.01 par value, 250,000,000 shares authorized, 78,777,771 shares issued and outstanding at June 30, 2016; and 80,232,260 shares issued and outstanding at December 31, 2015
788

 
802

Additional paid-in capital
1,520,507

 
1,550,337

Retained earnings
260,036

 
241,574

Accumulated other comprehensive loss
(4,845
)
 
(13,213
)
Total shareholders’ equity
1,776,486

 
1,779,500

Total liabilities and shareholders’ equity
$
6,945,875

 
$
6,569,964


The accompanying notes are an integral part of these unaudited consolidated financial statements.

3


Aircastle Limited and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Lease rental revenue
$
176,125

 
$
184,839

 
$
355,695

 
$
361,985

Finance and sales-type lease revenue
4,174

 
1,877

 
7,672

 
3,484

Amortization of net lease discounts and lease incentives
(3,828
)
 
(4,351
)
 
(4,898
)
 
(8,175
)
Maintenance revenue
12,514

 
21,349

 
13,774

 
39,422

Total lease revenue
188,985

 
203,714

 
372,243

 
396,716

Other revenue
1,003

 
851

 
1,410

 
2,145

Total revenues
189,988

 
204,565

 
373,653

 
398,861

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Depreciation
75,070

 
77,368

 
151,717

 
152,214

Interest, net
62,452

 
61,551

 
126,693

 
123,682

Selling, general and administrative (including non-cash share based payment expense of $2,094 and $1,387 for the three months ended and $3,737 and $2,557 for the six months ended June 30, 2016 and 2015, respectively)
15,406

 
14,699

 
30,898

 
28,631

Impairment of aircraft
16,723

 
23,955

 
16,723

 
23,955

Maintenance and other costs
2,267

 
3,663

 
3,670

 
6,606

Total expenses
171,918

 
181,236

 
329,701

 
335,088

 
 
 
 
 
 
 
 
Other income:
 
 
 
 
 
 
 
Gain on sale of flight equipment
2,172

 
21,102

 
15,005

 
27,355

Other
147

 
277

 
74

 
271

Total other income
2,319

 
21,379

 
15,079

 
27,626

 
 
 
 
 
 
 
 
Income from continuing operations before income taxes and earnings of unconsolidated equity method investment
20,389

 
44,708

 
59,031

 
91,399

Income tax provision
2,385

 
4,465

 
6,324

 
9,328

Earnings of unconsolidated equity method investment, net of tax
2,026

 
1,565

 
3,585

 
3,006

Net income
$
20,030

 
$
41,808

 
$
56,292

 
$
85,077

 
 
 
 
 
 
 
 
Earnings per common share — Basic:
 
 
 
 
 
 
 
Net income per share
$
0.25

 
$
0.51

 
$
0.71

 
$
1.05

 
 
 
 
 
 
 
 
Earnings per common share — Diluted:
 
 
 
 
 
 
 
Net income per share
$
0.25

 
$
0.51

 
$
0.71

 
$
1.05

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.24

 
$
0.22

 
$
0.48

 
$
0.44


The accompanying notes are an integral part of these unaudited consolidated financial statements.

4


Aircastle Limited and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income
$
20,030

 
$
41,808

 
$
56,292

 
$
85,077

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net change in fair value of derivatives, net of tax expense
of $0 and $26 for the three months ended and tax expense of $0 and $23 for the six months ended June 30, 2016 and 2015, respectively

 
564

 
(1
)
 
436

Net derivative loss reclassified into earnings
2,997

 
6,110

 
8,369

 
14,343

Other comprehensive income
2,997

 
6,674

 
8,368

 
14,779

Total comprehensive income
$
23,027

 
$
48,482

 
$
64,660

 
$
99,856



The accompanying notes are an integral part of these unaudited consolidated financial statements.

5


Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
56,292

 
$
85,077

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
151,717

 
152,214

Amortization of deferred financing costs
9,470

 
7,465

Amortization of net lease discounts and lease incentives
4,898

 
8,175

Deferred income taxes
2,243

 
(1,363
)
Non-cash share based payment expense
3,737

 
2,557

Cash flow hedges reclassified into earnings
8,369

 
14,343

Security deposits and maintenance payments included in earnings
(5,651
)
 
(22,382
)
Gain on sale of flight equipment
(15,005
)
 
(27,355
)
Impairment of aircraft
16,723

 
23,955

Other
(2,843
)
 
108

Changes in certain assets and liabilities:
 
 
 
Accounts receivable
3,262

 
(1,697
)
Other assets
(85
)
 
(2,155
)
Accounts payable, accrued expenses and other liabilities
4,284

 
7,018

Lease rentals received in advance
(2,714
)
 
3,646

Net cash provided by operating activities
234,697

 
249,606

Cash flows from investing activities:
 
 
 
Acquisition and improvement of flight equipment
(478,026
)
 
(797,136
)
Proceeds from sale of flight equipment
339,507

 
231,842

Restricted cash and cash equivalents related to sale of flight equipment
17,000

 
(76,433
)
Aircraft purchase deposits and progress payments, net of returned deposits and aircraft sales deposits
(9,801
)
 
(3,461
)
Net investment in finance leases
(78,365
)
 
(24,000
)
Collections on finance and sales-type leases
7,833

 
4,795

Unconsolidated equity method investment and associated costs
(11,688
)
 

Other
(509
)
 
(256
)
Net cash used in investing activities
(214,049
)
 
(664,649
)
Cash flows from financing activities:
 
 
 
Repurchase of shares
(33,854
)
 
(1,960
)
Proceeds from secured and unsecured debt financings
787,310

 
800,000

Repayments of secured and unsecured debt financings
(459,021
)
 
(319,994
)
Deferred financing costs
(16,121
)
 
(11,658
)
Restricted secured liquidity facility collateral
65,000

 

Liquidity facility
(65,000
)
 

Restricted cash and cash equivalents related to financing activities
29,719

 
13,463

Security deposits and maintenance payments received
72,572

 
71,536

Security deposits and maintenance payments returned
(26,094
)
 
(27,336
)
Dividends paid
(37,830
)
 
(35,723
)
Net cash provided by financing activities
316,681

 
488,328

Net increase in cash and cash equivalents
337,329

 
73,285

Cash and cash equivalents at beginning of period
155,904

 
169,656

Cash and cash equivalents at end of period
$
493,233

 
$
242,941


6


Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2016
 
2015
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
104,534

 
$
89,639

Cash paid for income taxes
$
2,809

 
$
3,918

Supplemental disclosures of non-cash investing activities:
 
 
 
Advance lease rentals, security deposits and maintenance payments assumed in asset acquisitions
$
105,801

 
$
7,841

Advance lease rentals, security deposits, and maintenance payments settled in sale of flight equipment
$
21,159

 
$
40,199

Transfers from Flight equipment held for lease to Net investment in finance and sales-type leases and Other assets
$
86,267

 
$
18,851


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)
June 30, 2016


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 investing in aviation assets, including acquiring, leasing, managing and selling high-utility commercial jet aircraft.
Aircastle is a holding company that conducts its business through subsidiaries. Aircastle directly or indirectly owns all of the 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 on the basis of 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 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 December 31, 2015 .
The Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure since the balance sheet date of June 30, 2016 through the date on which the consolidated financial statements included in this Form 10-Q were issued.
Effective January 1, 2016, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-02, Consolidation - Amendments to the Consolidation Analysis (Topic 810). The update amended the guidelines for determining whether certain legal entities should be consolidated and reduced the number of consolidation models. This new standard affected reporting entities that are required to evaluate whether they should consolidate certain legal entities. The standard did not have a material impact on our consolidated financial statements and related disclosures.
Principles of Consolidation
The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates five Variable Interest Entities (“VIEs”) of which Aircastle is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
We consolidate VIEs in which we have determined that we are the primary beneficiary. We use judgment when deciding: (a) whether an entity is subject to consolidation as a VIE; (b) who the variable interest holders are; (c) the potential expected losses and residual returns of the variable interest holders; and (d) which variable interest holder is the primary beneficiary. When determining which enterprise is the primary beneficiary, we consider: (1) the entity’s purpose and design; (2) which variable interest holder has the power to direct the activities that most significantly impact the entity’s economic performance; and (3) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. When certain events occur, we reconsider whether we are the primary beneficiary of VIEs. We do not reconsider whether we are a primary beneficiary solely because of operating losses incurred by an entity.



8



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


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 that the estimates and related assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates.
Recent Accounting Pronouncements
On February 25, 2016, the FASB issued Accounting Standards Codification (“ASC”) 842 (“ASC 842”), “ Leases ,” which replaced the existing guidance in ASC 840, Leases . The accounting for leases by lessors basically remained unchanged from the concepts that existed in ASC 840 accounting. The FASB decided that lessors would be precluded from recognizing selling profit and revenue at lease commencement for any sales-type or direct finance lease that does not transfer control of the underlying asset to the lessee. This requirement aligns the notion of what constitutes a sale in the lessor accounting guidance with that in the forthcoming revenue recognition standard, which evaluates whether a sale has occurred from the customer’s perspective. The standard will be effective for public entities beginning after December 15, 2018. The standard is applied on a “modified retrospective” basis. We are evaluating the impact that ASC 842 will have on our consolidated financial statements and related disclosures. We do not believe that the adoption of the standard will significantly impact our existing or potential lessees' economic decisions to lease aircraft.
On May 28, 2014, the FASB and the International Accounting Standards Board (the “IASB”) (collectively, “the Boards”), jointly issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Lease contracts within the scope of ASC 840, Leases , are specifically excluded from ASU No. 2014-09. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The standard is effective for public entities beginning after December 15, 2017. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. We are evaluating the impact of the ASU on our consolidated financial statements and related disclosures.
On August 27, 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The standard requires management of public companies to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and, if so, disclose that fact. Management should evaluate whether there are conditions or events, considered in the aggregate, that raises substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued, when applicable). The standard is effective for annual periods ending after December 15, 2016 and interim periods thereafter, and early adoption is permitted. We do not believe the standard will have a material impact on our consolidated financial statements and related disclosures when adopted.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718). The update amends the guidelines for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard is effective for annual and interim periods beginning January 1, 2017, and early adoption is permitted. We are evaluating the impact of the ASU on our consolidated financial statements and related disclosures.
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. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.


9



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs.
Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants price the asset or liability.
The valuation techniques that may be used to measure fair value are as follows:
The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts.
The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
The following tables set forth our financial assets and liabilities as of June 30, 2016 and December 31, 2015 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities 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 June 30, 2016
Using Fair Value Hierarchy
 
Fair Value as of June 30, 2016
 
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
$
493,233

 
$
493,233

 
$

 
$

 
Market
Restricted cash and cash equivalents
51,418

 
51,418

 

 

 
Market
Total
$
544,651

 
$
544,651

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$

 
$

 
$

 
$

 
Income

 
 
 
Fair Value Measurements at December 31, 2015 Using Fair Value Hierarchy
 
Fair Value as of December 31, 2015
 
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
$
155,904

 
$
155,904

 
$

 
$

 
Market
Restricted cash and cash equivalents
98,137

 
98,137

 

 

 
Market
Total
$
254,041

 
$
254,041

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
1,283

 
$

 
$
1,283

 
$

 
Income


10



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


Our cash and cash equivalents, along with our restricted cash and cash equivalents balances, consist largely of money market securities that are considered to be 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 our fair value hierarchy. Our interest rate derivatives included in Level 2 consist of United States dollar-denominated interest rate derivatives, and their fair values are determined by applying standard modeling techniques under the income approach to relevant market interest rates (cash rates, futures rates, swap rates) in effect at the period close to determine appropriate reset and discount rates and incorporates an assessment of the risk of non-performance by the interest rate derivative counterparty in valuing derivative assets and an evaluation of the Company’s credit risk in valuing derivative liabilities.
For the three and six months ended June 30, 2016 and the year ended December 31, 2015 , 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 that the carrying amounts of assets may not be recoverable. Assets subject to these measurements include our investment in an unconsolidated joint venture and aircraft. We account for our investment in an unconsolidated joint venture under the equity method of accounting and record impairment when its fair value is less than its carrying value. 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 an income approach which uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft.
Aircraft Valuation
Recoverability Assessment
We completed our annual recoverability assessment of wide-body and freighter aircraft in the second quarter this year given weaker market dynamics for these aircraft. We intend to complete the recoverability assessment for our narrow-body aircraft fleet during the third quarter. We also performed aircraft-specific analyses where there were changes in circumstances, such as approaching lease expirations.
The recoverability assessment is a comparison of the carrying value of each aircraft to its undiscounted expected future cash flows. We develop the assumptions used in the recoverability assessment, including those relating to current and future demand for each aircraft type, based on management’s experience in the aircraft leasing industry, as well as information received from third-party sources. Estimates of the undiscounted cash flows for each aircraft type are impacted by changes in contracted and future expected lease rates, residual values, expected scrap values, economic conditions and other factors.
In our 2016 assessment, we reduced forecasted cash flows for older Airbus A330 aircraft to reflect lower rental expectations given weak demand and increased competition from newer units. As a result, during the three months ended June 30, 2016, we recorded impairment charges totaling $11,670 and maintenance revenue of $4,000 relating to one sixteen year old Airbus A330-200 approaching lease expiry.
Other Impairments
During the six months ended June 30, 2016 , we entered into an agreement to sell two older Boeing 747-400 freighter aircraft to the lessee resulting in an impairment of $5,053 . These two aircraft are held for sale at June 30, 2016 in other assets. These aircraft were sold in July 2016.
During the six months ended June 30, 2015, we impaired two McDonnell Douglas MD-11 freighter aircraft and one Boeing 737-800 aircraft and recorded impairment charges totaling $23,955 and maintenance revenue of $18,234 .
Other than the aircraft discussed above, management believes that the net book value of each of our wide-body and freighter aircraft is currently supported by the estimated future undiscounted cash flows expected to be generated by that aircraft, and accordingly, no other aircraft were impaired as a consequence of this recoverability assessment. However, if

11



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


our estimates or assumptions change, we may revise our cash flow assumptions and record future impairment charges. While we believe that the estimates and related assumptions used in the recoverability assessment are appropriate, actual results could differ from those estimates.
Financial Instruments
Our financial instruments, other than cash, consist principally of cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable, amounts borrowed under financings and interest rate derivatives. The fair value of cash, 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 values of our ECA Financings (as described in Note 6 - Variable Interest Entities below) and Bank Financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements. The fair value of our Senior Notes is estimated using quoted market prices.
The carrying amounts and fair values of our financial instruments at June 30, 2016 and December 31, 2015 are as follows:
 
June 30, 2016
 
December 31, 2015
 
Carrying  Amount
of Liability
 
Fair Value
of Liability
 
Carrying
Amount
of Liability
 
Fair Value
of Liability
Securitizations
$

 
$

 
$
125,366

 
$
123,696

Credit Facilities
120,000

 
120,000

 
225,000

 
225,000

ECA Financings
326,004

 
347,409

 
404,491

 
422,640

Bank Financings
774,903

 
794,875

 
636,970

 
653,699

Senior Notes
3,200,000

 
3,360,390

 
2,700,000

 
2,832,125

All of our financial instruments are classified as Level 2 with the exception of 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 June 30, 2016 were as follows:
Year Ending December 31,
Amount
Remainder of 2016
$
360,019

2017
647,844

2018
573,162

2019
499,783

2020
413,445

Thereafter
1,153,821

Total
$
3,648,074









12



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Region
2016
 
2015
 
2016
 
2015
Asia and Pacific
39
%
 
42
%
 
40
%
 
42
%
Europe
24
%
 
28
%
 
25
%
 
29
%
South America
19
%
 
15
%
 
19
%
 
14
%
Middle East and Africa
12
%
 
9
%
 
11
%
 
9
%
North America
6
%
 
6
%
 
5
%
 
6
%
Total
100
%
 
100
%
 
100
%
 
100
%

The classification of regions in the tables above and in the table 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% and their combined total percentage of lease rental revenue for the years indicated:
 
Three Months Ended
June 30, 2016
 
Three Months Ended
June 30, 2015
 
Six Months Ended
June 30, 2016
 
Six Months Ended
June 30, 2015
 
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
 
25%
 
3
 
17%
 
4
 
25%
 
3
 
18%
The following table sets forth revenue attributable to individual countries representing at least 10% of total revenue (including maintenance revenue) in any year based on each lessee’s principal place of business for the years indicated:
 
Three Months Ended
June 30, 2016
 
Three Months Ended
June 30, 2015
 
Six Months Ended
June 30, 2016
 
Six Months Ended
June 30, 2015
Country
Revenue
 
% of
Total
Revenue
 
Revenue
 
% of
Total
Revenue
 
Revenue
 
% of
Total
Revenue
 
Revenue
 
% of
Total
Revenue
Indonesia (1)
$
19,906

 
11%
 
$

 
—%
 
$
39,450

 
11%
 
$

 
—%
_______________
(1)
Total revenue attributable to Indonesia was less than 10% for the three and six months ended June 30, 2015.









13



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


Geographic concentration of net book value of flight equipment (includes net book value of flight equipment held for lease and net investment in finance leases) was as follows:
 
June 30, 2016
 
December 31, 2015
Region
Number
of
Aircraft
 
Net Book
Value %
 
Number
of
Aircraft
 
Net Book
Value %
Asia and Pacific
49

 
37
%
 
49

 
39
%
Europe
59

 
24
%
 
64

 
26
%
South America
22

 
18
%
 
22

 
19
%
Middle East and Africa
13

 
11
%
 
9

 
10
%
North America
23

 
8
%
 
17

 
6
%
Off-lease
3

(1)  
2
%
 
1

(2)  
%
Total
169

 
100
%
 
162

 
100
%
 
_______________
(1)
Consists of two Boeing 737-800 aircraft, for which we have signed lease agreements with customers in Asia, and one Airbus A330-200 aircraft, for which we have a signed lease agreement with a customer in South America.
(2)
Consisted of one Boeing 777-200ER aircraft that was sold during the second quarter of 2016.
The following table sets forth net book value of flight equipment (includes net book value of flight equipment held for lease and net investment in finance 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:
 
June 30, 2016
 
December 31, 2015
Region
Net Book
Value
Net Book
Value %
Number
of
Lessees
 
Net Book
Value
Net Book
Value %
Number
of
Lessees
Indonesia
$
647,022

11%
3
 
$
661,178

11%
3
At June 30, 2016 and December 31, 2015 , the amounts of lease incentive liabilities recorded in maintenance payments on our Consolidated Balance Sheets were $18,045 and $21,432 , respectively.
Note 4. Net Investment in Finance and Sales-Type Leases
At June 30, 2016 , our net investment in finance and sales-type leases represents fourteen aircraft: eight aircraft leased to two customers in the United States, two aircraft leased to a customer in the Netherlands, three aircraft leased to two customers in Germany and one aircraft leased to a customer in Spain. The following table lists the components of our net investment in finance and sales-type leases at June 30, 2016 :
 
 
Amount
Total lease payments to be received
 
$
229,766

Less: Unearned income
 
(97,315
)
Estimated residual values of leased flight equipment (unguaranteed)
 
159,452

Net investment in finance and sales-type leases
 
$
291,903






14



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


At June 30, 2016 , minimum future lease payments on finance and sales-type leases are as follows:
Year Ending December 31,
 
Amount
Remainder of 2016
 
$
21,774

2017
 
39,718

2018
 
32,189

2019
 
32,018

2020
 
30,938

Thereafter
 
73,129

Total lease payments to be received
 
$
229,766

Note 5. Unconsolidated Equity Method Investment
On December 19, 2013, the Company and an affiliate of Ontario Teachers’ Pension Plan (“Teachers’”) formed a joint venture (“Lancaster”), in which we hold a 30% equity interest, to invest in leased aircraft. Teachers’ holds 10.0% of our outstanding common shares. In March 2016, we sold four Airbus A320-200 aircraft for approximately $100,000 to Lancaster; these transactions were approved by our Audit Committee as arm’s length related party transactions under our related party policy. The assets and liabilities of Lancaster are off our Consolidated Balance Sheet and we record our net investment under the equity method of accounting.
On February 23, 2016, through the Company’s relationship with Marubeni Corporation, we established a new joint venture (“IBJ Air”) with the leasing arm of the Industrial Bank of Japan, Limited (“IBJL”). This new venture is targeted at new narrow-body aircraft leased to premier airlines providing Aircastle with increased access to this market sector and to these customers. In June 2016, we sold one Airbus A320-200 aircraft to IBJ Air, in which we hold a 25% equity interest.
We source and service investments for Lancaster and IBJ Air and provide marketing, asset management and administrative services to them. We are paid market-based fees for those services, which are recorded in Other revenue in our Consolidated Statements of Income. The Company has recorded in its Consolidated Balance Sheet a $7,705 guarantee liability in Maintenance payments and a $5,100 guarantee liability in Security deposits representing its share of the respective exposures.
At June 30, 2016 , the net book value of our joint ventures’ ten aircraft was approximately $612 million.
 
 
Amount
Investment in joint ventures at December 31, 2015
 
$
50,377

Investment in joint ventures
 
12,424

Earnings from joint ventures, net of tax
 
3,585

Distributions
 
(2,029
)
Investment in joint ventures at June 30, 2016
 
$
64,357






15



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


Note 6. Variable Interest Entities
Aircastle consolidates five VIEs of which it is the primary beneficiary. The operating activities of these VIEs are limited to acquiring, owning, leasing, maintaining, operating and, under certain circumstances, selling the seven aircraft discussed below.
Securitization No. 2
In May 2016, we repaid the outstanding amount plus accrued interest and fees due under Securitization No. 2, and ACS Aircraft Finance Ireland 2 Limited became a wholly owned subsidiary of Aircastle.
ECA Financings
Aircastle, through various subsidiaries, each of which is owned by a charitable trust (such entities, collectively the “Air Knight VIEs”), has entered into seven different twelve -year term loans, which are supported by guarantees from Compagnie Française d'Assurance pour le Commerce Extérieur, (“COFACE”), the French government sponsored export credit agency (“ECA”). We refer to these COFACE-supported financings as “ECA Financings.”
Aircastle is the primary beneficiary of the Air Knight VIEs, as we have the power to direct the activities of the VIEs that most significantly impact the economic performance of such VIEs and we bear the significant risk of loss and participate in gains through a finance lease. The activity that most significantly impacts the economic performance is the leasing of aircraft of which our wholly owned subsidiary is the servicer and is responsible for managing the relevant aircraft. There is a cross collateralization guarantee between the Air Knight VIEs. In addition, Aircastle guarantees the debt of the Air Knight VIEs.
The only assets that the Air Knight VIEs have on their books are financing leases that are eliminated in the consolidated financial statements. The related aircraft, with a net book value as of June 30, 2016 of $526,343 , were included in our flight equipment held for lease. The consolidated debt outstanding, net of debt issuance costs, of the Air Knight VIEs as of June 30, 2016 is $315,731 .














16



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


Note 7. Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured term debt financings are as follows:
 
At June 30, 2016
 
At December 31, 2015
Debt Obligation
Outstanding
Borrowings
 
Number of Aircraft
 
Interest Rate (1)
 
Final Stated
Maturity
 
Outstanding
Borrowings
Secured Debt Financings:
 
 
 
 
 
 
 
 
 
Securitization No. 2
$

 

 
—%
 
 
$
125,366

ECA Financings (2)
326,004

 
7

 
3.02% to 3.96%
 
12/3/21 to 11/30/24
 
404,491

Bank Financings (3)
774,903

 
20

 
1.44% to 5.09%
 
10/26/17 to 01/19/26
 
636,970

Less: Debt Issuance Costs
(22,084
)
 

 
 
 
 
 
(20,589
)
Total secured debt financings, net of debt issuance costs
1,078,823

 
27

 
 
 
 
 
1,146,238

 
 
 
 
 
 
 
 
 
 
Unsecured Debt Financings:
 
 
 
 
 
 
 
 
 
Senior Notes due 2017
500,000

 
 
 
6.75%
 
04/15/17
 
500,000

Senior Notes due 2018
400,000

 
 
 
4.625%
 
12/05/18
 
400,000

Senior Notes due 2019
500,000

 
 
 
6.250%
 
12/01/19
 
500,000

Senior Notes due 2020
300,000

 
 
 
7.625%
 
04/15/20
 
300,000

Senior Notes due 2021
500,000

 
 
 
5.125%
 
03/15/21
 
500,000

Senior Notes due 2022
500,000

 
 
 
5.50%
 
02/15/22
 
500,000

Senior Notes due 2023
500,000

 
 
 
5.00%
 
04/01/23
 

DBJ Term Loan
120,000

 
 
 
2.653%
 
04/28/19
 

Revolving Credit Facility

 
 
 
N/A
 
05/13/20
 
225,000

   Less: Debt Issuance Costs
(36,029
)
 
 
 
 
 
 
 
(30,082
)
Total unsecured debt financings, net of debt issuance costs
3,283,971

 
 
 
 
 
 
 
2,894,918

 
 
 
 
 
 
 
 
 
 
Total secured and unsecured debt financings, net of debt issuance costs
$
4,362,794

 
 
 
 
 
 
 
$
4,041,156

 
        
(1)
Reflects the floating rate in effect at the applicable reset date plus the margin for our DBJ Term Loan, six of our Bank Financings and our Revolving Credit Facility. All other financings have a fixed rate.
(2)
The borrowings under these financings at June 30, 2016 have a weighted-average rate of interest of 3.53% .
(3)
The borrowings under these financings at June 30, 2016 have a weighted-average fixed rate of interest of 3.21% .
Secured Debt Financings:
Securitization No. 2
On May 9, 2016, we prepaid the outstanding principal balance plus accrued interest and fees due under Securitization No. 2 and terminated the related interest rate derivatives for a total of $66,262 . Upon prepayment of Securitization No. 2, our liquidity facility commitment with HSH Nordbank AG ended and all drawn cash was returned.
Bank Financings
On June 17, 2016, we entered into a full recourse $400,450 floating rate financing with BNP Paribas, Credit Agricole Corporate and Investment Bank and certain other banks for seventeen aircraft initially, with the possibility of adding two


17



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


incremental aircraft for an additional $67,550 . As of June 30, 2016, we have funded seven aircraft for $167,310 under this facility, which matures in June of 2023.
Unsecured Debt Financings:
DBJ Term Loan
In March 2016, we entered into a $120,000 floating rate three year term loan commitment with Development Bank of Japan Inc. and certain other banks (the “DBJ Term Loan”). This loan was funded in April 2016.
Senior Notes due 2023
On March 21, 2016, Aircastle issued $500,000 aggregate principal amount of Senior Notes due 2023 (the "Senior Notes due 2023") at par. The Senior Notes due 2023 will mature on April 1, 2023 and bear interest at the rate of 5.00% per annum, payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 2016. Interest accrues on the Senior Notes due 2023 from March 24, 2016.
We may redeem the Senior Notes due 2023 at any time at a redemption price equal to (a) 100% of the principal amount of the notes redeemed, plus accrued and unpaid interest thereon to, but not including, the redemption date and (b) the sum of the present values of the remaining scheduled payments of principal and interest on the notes from the redemption date through the maturity date of the notes (computed using a discount rate equal to the Treasury Rate (as defined in the indenture governing the notes) as of such redemption date plus 50 basis points). In addition, prior to April 1, 2019, we may redeem up to 40% of the aggregate principal amount of the notes issued under the indenture at a redemption price equal to 105% plus accrued and unpaid interest thereon to, but not including, the redemption date, with the net proceeds of certain equity offerings. If the Company undergoes a change of control, it must offer to repurchase the Senior Notes due 2023 at 101% of the principal amount, plus accrued and unpaid interest. The Senior Notes due 2023 are not guaranteed by any of the Company's subsidiaries or any third-party.
Revolving Credit Facility
On March 29, 2016, we increased the size of our unsecured Revolving Credit Facility from $600,000 to $675,000 and extended its maturity by one year to May 2020. At June 30, 2016 , we had no amounts outstanding under this facility.
As of June 30, 2016 , we are in compliance with all applicable covenants in all of our financings.
Note 8. Shareholders' Equity and Share Based Payment
Performance Stock Units
During the six months ended June 30, 2016, the Company issued performance share units (“PSUs”) to certain employees. These awards were made under the Aircastle Limited 2014 Omnibus Incentive Plan. The PSUs are denominated in share units without dividend rights, each of which is equivalent to one common share, and are subject to performance conditions and time vesting.
The PSUs vest at the end of a three year period, which runs from January 1, 2016 through December 31, 2018. Half of the PSUs vest on achieving relative total stockholder return goals (the "TSR PSUs") while the other half vest on attaining annual Adjusted Return on Equity goals (the "AROE PSUs"). The table below shows the PSU awards granted during the six months ended June 30, 2016, including the number of common shares underlying the awards at the time of grant:
 
Minimum
 
Target
 
Maximum
TSR PSUs

 
133,957

 
267,914

AROE PSUs

 
133,953

 
267,906

Total

 
267,910

 
535,820


18



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


The fair value of the time based TSR PSUs was determined at the grant date using a Monte Carlo simulation model. Included in the Monte Carlo simulation model were certain assumptions regarding a number of highly complex and subjective variables, such as expected volatility, risk-free interest rate and dividend yield. To appropriately value the award, the risk-free interest rate is estimated for the time period from the valuation date until the vesting date and the historical volatilities were estimated based on a historical time frame equal to the time from the valuation date until the end date of the performance period. The number of TSR PSUs that will ultimately vest is based on the percentile ranking of the Company’s TSR among the S&P 400 Index. The number of shares that will ultimately vest will range from 0% to 200% of the target TSR PSUs.
The number of shares vesting from the AROE PSUs at the end of the three-year performance period will depend on the Company’s Adjusted Return on Equity as measured against the targets set by the Compensation Committee annually during the performance period, consistent with the business plan approved by the Board. The maximum number of AROE PSUs for 2016 is 89,302 . The fair value of the 2016 AROE PSUs was determined based on the closing market price of the Company’s common shares on the date of grant reduced by the present value of expected dividends to be paid. The number of shares that will ultimately vest will range from 0% to 200% of the target AROE PSUs.
During the six months ended June 30, 2016 , the Company granted a target of 178,608 PSUs of which 133,957 are TSR PSUs and 44,651 are AROE PSUs. The remaining 89,302 of target AROE PSUs will be considered granted upon the Compensation Committee’s setting the target AROE for the respective period. The following table summarizes the activities for our unvested PSUs for the six months ended June 30, 2016 :
 
Unvested Performance Stock Units
 
Target Number of Shares of TSR PSUs
 
Target Number of Shares of AROE PSUs
 
TSR PSUs Weighted Fair Value at Grant Date Using a Monte Carlo Simulation Model ($)
 
AROE PSUs
Fair Value Equal
to Adjusted Closing Stock
Price on Date of
Grant ($)
Unvested at December 31, 2015

 

 
$

 
$

     Granted
133,957

 
44,651

 
25.20

 
19.17

Unvested as of June 30, 2016
133,957

 
44,651

 
$
25.20

 
$
19.17

Expected to vest after June 30, 2016
133,957

 
44,651

 
$
25.20

 
$
19.17

The Company incurred share based compensation expense related to PSUs of $452 for the six months ended June 30, 2016 . As of June 30, 2016 , there was $3,780 of unrecognized compensation cost related to unvested stock-based payments granted to certain employees that is expected to be recognized over a weighted-average remaining period of 2.5 years .
During the first six months of 2016, we repurchased 1,683,713 common shares at an aggregate cost of $31,704 , including commissions. As of June 30, 2016, the remaining dollar value of common shares that may be repurchased under the repurchase program approved by the Company’s Board of Directors on February 9, 2016, is $99,375 .










19



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


Note 9. Dividends
The following table sets forth the quarterly dividends declared by our Board of Directors for the periods covered in this report:
Declaration Date
Dividend per
Common  Share
 
Aggregate
Dividend
Amount
 
Record Date
 
Payment Date
May 2, 2016
$
0.24

 
$
18,915

 
May 31, 2016
 
June 15, 2016
February 9, 2016
$
0.24

 
$
18,915

 
February 29, 2016
 
March 15, 2016
October 30, 2015
$
0.24

 
$
19,377

 
November 30, 2015
 
December 15, 2015
August 4, 2015
$
0.22

 
$
17,860

 
August 31, 2015
 
September 15, 2015
May 4, 2015
$
0.22

 
$
17,863

 
May 29, 2015
 
June 15, 2015
Note 10. Earnings Per Share
We include all common shares granted under our incentive compensation plan which remain unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (“participating securities”), in the number of shares outstanding in our basic earnings per share calculations using the two-class method. All of our restricted common shares are currently participating securities.
Under the two-class method, earnings per common share is computed by dividing the sum of distributed earnings allocated to common shareholders and undistributed earnings allocated to common shareholders by the weighted-average number of common shares outstanding for the period. In applying the two-class method, distributed and undistributed earnings are allocated to both common shares and restricted common shares based on the total weighted-average shares outstanding during the period. Because the holders of the participating restricted common shares were not contractually required to share in the Company’s losses, in applying the two-class method to compute the basic and diluted net loss per common share, no allocation to restricted common shares was made for the three and six months ended June 30, 2016 .
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Weighted-average shares:
 
 
 
 
 
 
 
Common shares outstanding
78,159,280

 
80,566,400

 
78,351,369

 
80,565,425

Restricted common shares
685,918

 
650,206

 
629,137

 
583,213

Total weighted-average shares
78,845,198

 
81,216,606

 
78,980,506

 
81,148,638

 
 
 
 
 
 
 
 
Percentage of weighted-average shares:
 
 
 
 
 
 
 
Common shares outstanding
99.13
%
 
99.20
%
 
99.20
%
 
99.28
%
Restricted common shares
0.87
%
 
0.80
%
 
0.80
%
 
0.72
%
Total percentage of weighted-average shares
100.00
%
 
100.00
%
 
100.00
%
 
100.00
%







20



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


The calculations of both basic and diluted earnings per share are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Earnings per share – Basic:
 
 
 
 
 
 
 
Net income
$
20,030

 
$
41,808

 
$
56,292

 
$
85,077

Less: Distributed and undistributed earnings allocated to restricted common shares (1)
(174
)
 
(335
)
 
(448
)
 
(611
)
Earnings available to common shareholders – Basic
$
19,856

 
$
41,473

 
$
55,844

 
$
84,466

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
78,159,280

 
80,566,400

 
78,351,369

 
80,565,425

 
 
 
 
 
 
 
 
Earnings per common share – Basic
$
0.25

 
$
0.51

 
$
0.71

 
$
1.05

 
 
 
 
 
 
 
 
Earnings per share – Diluted:
 
 
 
 
 
 
 
Net income
$
20,030

 
$
41,808

 
$
56,292

 
$
85,077

Less: Distributed and undistributed earnings allocated to restricted common shares (1)
(174
)
 
(335
)
 
(448
)
 
(611
)
Earnings available to common shareholders – Diluted
$
19,856

 
$
41,473

 
$
55,844

 
$
84,466

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
78,159,280

 
80,566,400

 
78,351,369

  
80,565,425

Effect of dilutive shares (2)

 

 

 

Weighted-average common shares outstanding – Diluted
78,159,280

 
80,566,400

 
78,351,369

  
80,565,425

 
 
 
 
 
 
 
 
Earnings per common share – Diluted
$
0.25

 
$
0.51

 
$
0.71

  
$
1.05

 
        
(1)
For the three months ended June 30, 2016 and 2015 , distributed and undistributed earnings to restricted shares are 0.87% and 0.80% , respectively, of net income. For the six months ended June 30, 2016 and 2015 , distributed and undistributed earnings to restricted shares are 0.80% and 0.72% of net income, respectively. The amount of restricted share forfeitures for all periods present is immaterial to the allocation of distributed and undistributed earnings.
(2)
For the three and six months ended June 30, 2016 and 2015 , we had no dilutive shares.
Note 11. 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 an 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 Ireland, Singapore and the United States.
The sources of income from continuing operations before income taxes and earnings of unconsolidated equity method investment for the three and six months ended June 30, 2016 and 2015 were as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
U.S. operations
$
1,158

 
$
840

 
$
1,744

 
$
1,220

Non-U.S. operations
19,231

 
43,868

 
57,287

 
90,179

Total
$
20,389

 
$
44,708

 
$
59,031

 
$
91,399



21



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


All of our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are non-U.S. corporations. These non-U.S. subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes unless they operate within the U.S., in which case they may be subject to federal, state and local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius and Singapore are subject to tax in those respective jurisdictions.
We have a U.S. based subsidiary which provides management services to our non-U.S. subsidiaries and is subject to U.S. federal, state and local income taxes. We also have Ireland and Singapore based subsidiaries which provide management services to our non-U.S. subsidiaries and are subject to tax in those respective jurisdictions.
The consolidated income tax expense for the three and six months ended June 30, 2016 and 2015 was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2016 and 2015, respectively.
The Company’s effective tax rate for the three and six months ended June 30, 2016 was 11.7% and 10.7% , respectively, compared to 10.0% and 10.2% for the three and six months ended June 30, 2015 . Movements in the effective tax rates are generally caused by changes in the proportion of the Company’s pre-tax earnings in taxable and non-tax jurisdictions.
Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income consisted of the following: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Notional U.S. federal income tax expense at the statutory rate
$
7,136

 
$
15,648

 
$
20,661

 
$
31,990

U.S. state and local income tax, net
78

 
68

 
125

 
110

Non-U.S. operations:
 
 
 
 
 
 
 
Bermuda
(1,570
)
 
(7,368
)
 
(10,662
)
 
(15,895
)
Ireland
194

 
(1,785
)
 
2,073

 
(2,907
)
Singapore
(2,716
)
 
(1,375
)
 
(4,051
)
 
(2,731
)
Other
(872
)
 
(901
)
 
(2,083
)
 
(1,579
)
Non-deductible expenses in the U.S.
150

 
191

 
285

 
361

Other
(15
)
 
(13
)
 
(24
)
 
(21
)
Income tax provision
$
2,385

 
$
4,465

 
$
6,324

 
$
9,328

Note 12. Interest, Net
The following table shows the components of interest, net: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities (1)
$
55,779

 
$
51,413

 
$
109,103

 
$
101,648

Hedge ineffectiveness losses

 
294

 

 
294

Amortization of interest rate derivatives related to deferred losses
2,997

 
6,110

 
8,369

 
14,343

Amortization of deferred financing fees and debt discount (2)
3,863

 
3,766

 
9,470

 
7,465

Interest expense
62,639

 
61,583

 
126,942

 
123,750

Less interest income
(160
)
 
(32
)
 
(222
)
 
(68
)
Less capitalized interest
(27
)
 

 
(27
)
 

Interest, net
$
62,452

 
$
61,551

 
$
126,693

 
$
123,682



22



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


        
(1)
For the three and six months ended June 30, 2016 , includes $0 and $1,509 , respectively, in loan termination fees related to the sale of one aircraft.
(2)
For the three and six months ended June 30, 2016 , includes $0 and $1,972 , respectively, in deferred financing fees written off related to the sale of one aircraft.
Note 13. Commitments and Contingencies
At June 30, 2016 , we had commitments to acquire 37 aircraft, including 25 Embraer E-2 aircraft, for $1,400,540 .
Commitments, including $141,957 of progress payments, contractual price escalations and other adjustments for these aircraft, at June 30, 2016 , net of amounts already paid, are as follows:
Year Ending December 31,
 
Amount
Remainder of 2016
 
$
319,311

2017
 
170,253

2018
 
258,179

2019
 
293,756

2020
 
216,847

Thereafter
 
142,194

Total
 
$
1,400,540

Note 14. Other Assets
The following table describes the principal components of other assets on our Consolidated Balance Sheets as of:
 
June 30,
2016
 
December 31,
2015
Deferred federal income tax asset
$
791

 
$
1,362

Lease incentives and lease premiums, net of amortization of $35,151 and $31,623, respectively
83,109

 
86,874

Flight equipment held for sale (1)
43,016

 
12,901

Other assets
37,613

 
22,570

Total other assets
$
164,529

 
$
123,707

 
        
(1)
In July 2016, we sold two older Boeing 747-400 freighter aircraft.
Note 15. 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:
 
June 30,
2016
 
December 31,
2015
Accounts payable and accrued expenses
$
36,080

 
$
34,457

Deferred federal income tax liability
36,940

 
35,269

Accrued interest payable
43,674

 
37,606

Lease discounts, net of amortization of $24,213 and $19,403, respectively
18,669

 
22,443

Fair value of derivative liabilities

 
1,283

Total accounts payable, accrued expenses and other liabilities
$
135,363

 
$
131,058


23



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2016


Note 16. Accumulated Other Comprehensive Loss
The following table describes the principal components of accumulated other comprehensive loss recorded on our Consolidated Balance Sheets:
Changes in accumulated other comprehensive loss by component (1)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
(7,842
)
 
$
(30,355
)
 
$
(13,213
)
 
$
(38,460
)
Amounts recognized in other comprehensive loss on derivatives, net of tax expense of $0 and $14 for the three months ended and tax expense of $0 for the six months ended June 30, 2016 and 2015, respectively
(188
)
 
(317
)
 
(690
)
 
(1,395
)
Amounts reclassified from accumulated other comprehensive loss into income, net of tax expense of $0 and $12 for the three months ended and tax expense of $0 and $23 for the six months ended June 30, 2016 and 2015, respectively
3,185

 
6,991

 
9,058

 
16,174

   Net current period other comprehensive income
2,997

 
6,674

 
8,368

 
14,779

Ending balance
$
(4,845
)
 
$
(23,681
)
 
$
(4,845
)
 
$
(23,681
)
        
(1) All amounts are net of tax. Amounts in parentheses indicate debits.
Reclassifications from accumulated other comprehensive loss (1)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Amount of effective amortization of net deferred interest rate derivative losses (2)
$
2,997

 
$
6,110

 
$
8,369

 
$
14,343

Effective amount of net settlements of interest rate derivatives, net of tax expense of $0 and $12 for the three months ended and tax expense of $0 and $23 for the six months ended June 30, 2016 and 2015, respectively
188

 
881

 
689

 
1,831

Amount of loss reclassified from accumulated other comprehensive loss into income
$
3,185

 
$
6,991

 
$
9,058

 
$
16,174

        
(1) All amounts are net of tax.
(2) Included in interest expense.
At June 30, 2016 , the amount of deferred net loss expected to be reclassified from OCI into interest expense over the next twelve months related to our terminated interest rate derivatives is $2,449 .

24


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those described under “Risk Factors” and included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission (the “SEC”). Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and, unless otherwise indicated, the other financial information contained in this report has also been prepared in accordance with U.S. GAAP. Unless otherwise indicated, all references to “dollars” and “$” in this report are to, and all monetary amounts in this report are presented in, U.S. dollars.
All statements included or incorporated by reference in this Quarterly Report on Form 10-Q (this “report”), other than characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not necessarily limited to, statements relating to our ability to acquire, sell, lease or finance aircraft, raise capital, pay dividends, and increase revenues, earnings, EBITDA, Adjusted EBITDA and Adjusted Net Income and the global aviation industry and aircraft leasing sector. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “may,” “will,” “would,” “could,” “should,” “seeks,” “estimates” and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on our historical performance and that of our subsidiaries and on our current plans, estimates and expectations and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements; Aircastle can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any such forward-looking statements which are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. These risks or uncertainties include, but are not limited to, those described from time to time in Aircastle’s filings with the SEC and previously disclosed under “Risk Factors” in Part I - Item 1A of Aircastle’s 2015 Annual Report on Form 10-K and elsewhere in this report. In addition, new risks and uncertainties emerge from time to time, and it is not possible for Aircastle to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this report. Aircastle expressly disclaims any obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.
WEBSITE AND ACCESS TO THE COMPANY’S REPORTS
The Company’s Internet website can be found at www.aircastle.com. Our annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) are available free of charge through our website under “Investors — SEC Filings” as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
Statements and information concerning our status as a Passive Foreign Investment Company (“PFIC”) for U.S. taxpayers are also available free of charge through our website under “Investors — Tax Information (PFIC).”
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Board of Directors committee charters (including the charters of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee) are available free of charge through our website under “Investors — Corporate Governance.” In addition, our Code of Ethics for the Chief Executive and Senior Financial Officers, which applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Treasurer and Controller, is available in print, free of charge, to any shareholder upon request to Investor Relations, Aircastle Limited, c/o Aircastle Advisor LLC, 300 First Stamford Place, 5th Floor, Stamford, Connecticut 06902.
The information on the Company’s Internet website is not part of, or incorporated by reference, into this report, or any other report we file with, or furnish to, the SEC.

25


OVERVIEW
Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. As of June 30, 2016 , we owned and managed on behalf of our joint ventures 179 aircraft leased to 63 lessees located in 35 countries. Ten of these aircraft are managed for our joint ventures with Teachers’ and IBJL. Our aircraft are managed by an experienced team based in the United States, Ireland and Singapore. Our aircraft are subject to net leases whereby the lessee is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, although in a majority of cases, we are obligated to pay a portion of specified maintenance or modification costs. As of June 30, 2016 , the net book value of our flight equipment and finance lease aircraft was $6.17 billion compared to $6.07 billion at December 31, 2015. Our revenues and net income for the three and six months ended June 30, 2016 were $190.0 million  and $20.0 million , and $373.7 million and $56.3 million , respectively.
Growth in commercial air traffic is broadly correlated with world economic activity and, in recent years, has been expanding at a rate one and a half to two times that of global GDP growth. The expansion of air travel has driven a rise in the world aircraft fleet. There are currently 19,000 commercial mainline passenger and freighter aircraft in operation worldwide. This fleet is expected to continue expanding at an average annual rate of three to four percent over the next 20 years. In addition, aircraft leasing companies own an increasing share of the world’s commercial jet aircraft and now account for approximately 40% of this fleet.
Notwithstanding the sector’s long-term growth, the aviation markets have been, and are expected to remain, subject to economic variability, as well as to changes in macroeconomic variables such as fuel price levels and foreign exchange rates. The aviation industry is susceptible to external shocks, such as regional conflicts and terrorist events. Mitigating these risks is the portability of the assets, allowing aircraft to be redeployed to locations where demand is higher.
Air traffic data for the past several years has shown strong passenger market growth.  According to the International Air Transport Association, during the first six months of 2016, global passenger traffic increased 6.0% compared to the same period in 2015.  This strong growth was, in part, stimulated by lower air fare prices resulting from the significant drop in fuel prices. Air cargo demand, which is more sensitive to economic conditions, appears to have stabilized. During the first six months of 2016, air cargo traffic decreased 0.5% compared to the same period in 2015, but capacity increased 6.0% , further depressing load factors. This market continues to be hampered by oversupply arising from the rapid growth in belly cargo capacity in passenger aircraft as well as the production of dedicated freighter aircraft.
Demand for air travel varies considerably by region. Emerging market economies have generally been experiencing significant increases in air traffic, driven by rising levels of per capita income. Air traffic growth in some regions is being driven by the proliferation of low cost carriers, which have stimulated demand through lower prices, and by the expansion of long-haul "hub and spoke" traffic, such as that flowing through the Persian Gulf. Mature markets, such as North America and Western Europe, are likely to grow more slowly in tandem with their economies. Airlines operating in areas with political instability or weakening economies, such as those in Russia and Brazil, continue to face increasing pressures, and their near-term outlook is more uncertain. On balance, we believe air travel will increase over time, and as a result, we expect demand for modern aircraft will continue to remain strong over the long-term.
Capital availability for aircraft has varied over time, and we consider this variability to be a basic characteristic of our business. If pursued properly, this represents an important source of opportunity. Both debt and equity markets have improved globally over the past several years with the recovery from the global financial crisis. Strong U.S. debt capital market conditions benefited borrowers by permitting access to financing at historic lows while higher fees have driven down export credit agency (“ECA”) demand. Recently, ECA availability has been curtailed, both in the U.S. and in Europe due to political issues and an investigation into possible irregularities, respectively. Commercial bank debt continues to play a critical role for aircraft finance, although we believe regulatory pressures will ultimately limit its role. While financial markets conditions are currently attractive, heightened volatility stemming from global growth concerns and various geopolitical issues may increase capital costs and limit availability going forward. We believe these market forces should generate attractive new investment and trading opportunities upon which we are well placed to capitalize given our access to different financing sources, our limited capital commitments and our reputation as a reliable trading partner. Over the longer term, our strategy is to achieve an investment grade credit rating, which we believe will reduce our borrowing costs and enable more reliable access to debt capital throughout the business cycle.
We believe our business approach is differentiated from those of other large leasing companies. Our investment strategy is to seek out the best risk-adjusted return opportunities across the commercial jet market, so our acquisition targets vary with market conditions. We prefer to have capital resources available to capture investment opportunities that arise in the

26


context of changing market circumstances. As such, we limit large, long-term capital commitments and are therefore much less reliant on orders for new aircraft from aircraft manufacturers as a source of new investments. In general, we focus on discerning investment value in situations that are often more bespoke and generally less competitive.
We plan to grow our business and profits over the long-term while maintaining a countercyclical orientation, a bias towards limiting long-dated capital commitments and a conservative and flexible capital structure. Our business strategy entails the following elements:
Pursuing a disciplined and differentiated investment strategy. In our view, aircraft values change in different ways over time. As a consequence, we carefully evaluate investments across different aircraft models, ages, lessees and acquisition sources and re-evaluate these choices periodically as market conditions and relative investment values change. We believe the financing flexibility offered through unsecured debt and our team’s experience with a wide range of asset types enables our value oriented strategy and provides us with a competitive advantage for many investment opportunities. We view orders from equipment manufacturers to be part of our investment opportunity set but choose to limit long term capital commitments unless we believe there is an adequate return premium to compensate for risks and opportunity costs.
Originating investments from many different sources across the globe. Our strategy is to seek out worthwhile investments broadly leveraging our team’s wide range of contacts around the world. We utilize a multi-channel approach to sourcing acquisitions and have purchased aircraft from a large number of airlines, lessors, original equipment manufacturers, lenders and other aircraft owners. Since our formation in 2004, we have acquired aircraft from 78 different sellers.
Maintaining a conservative capital commitment profile. We choose to limit long-term capital commitments unless we believe there to be an adequate return premium to compensate for the related risks and opportunity costs. This approach sets us apart from most other large aircraft leasing companies.
Leveraging our strategic relationships. We intend to capture the benefits provided through the extensive global contacts and relationships maintained by Marubeni Corporation, which is our biggest shareholder and one of the largest Japanese trading companies. Marubeni has already enabled greater access to Japanese-based financing and helped source and develop our new joint venture with IBJ Leasing. Our joint venture with Teachers’ provides us with an opportunity to pursue larger transactions, manage portfolio concentrations and improve our return on deployed capital.
Maintaining efficient access to capital from a wide range of sources while targeting an investment grade credit rating. We believe the aircraft investment market is subject to forces related to the business cycle and our strategy is to increase our purchase activity when prices are low and to emphasize asset sales when competition for assets is high. To implement this approach, we believe it is very important to maintain access to a wide variety of financing sources. Our strategy is to improve our corporate credit ratings to an investment grade level by maintaining strong portfolio and capital structure metrics while achieving a critical size through accretive growth. We believe improving our credit rating will not only reduce our borrowing costs but also facilitate more reliable access to both secured and unsecured debt capital throughout the business cycle.
Selling assets when attractive opportunities arise and for portfolio management purposes.  We pursue asset sales, as opportunities arise over the course of the business cycle, with the aim of realizing profits and reinvesting proceeds where more accretive investments are available. We also use asset sales for portfolio management purposes, such as reducing lessee specific concentrations and lowering residual value exposures to certain aircraft types, and as an exit from investments when a sale would provide the greatest expected cash flow for us.
Capturing the value of our efficient operating platform and strong operating track record. We believe our team’s capabilities in the global aircraft leasing market place us in a favorable position to source and manage new income-generating activities. We intend to continue to focus our efforts in areas where we believe we have competitive advantages, including new direct investments as well as ventures with strategic business partners.
Intending to pay quarterly dividends to our shareholders based on the Company’s sustainable earnings levels. Aircastle has paid dividends each quarter since our initial public offering in 2006. On May 2, 2016 , our Board of Directors declared a regular quarterly dividend of $0.24 per common share, or an aggregate of $18.9 million for the three months ended June 30, 2016 , which was paid on June 15, 2016 to holders of record on May 31, 2016 . These dividends may not be indicative of the amount of any future dividends. Our ability to pay quarterly dividends will depend upon many factors, including those as described in Item 1A. “Risk Factors” and elsewhere in our 2015 Annual Report on Form 10-K.

27


Revenues
Our revenues are comprised primarily of operating lease rentals on flight equipment held for lease, revenue from retained maintenance payments related to lease expirations, lease termination payments, lease incentive amortization and interest recognized from finance and sales-type leases.
Typically, our aircraft are subject to net leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs arising during the term of the lease. Our aircraft lease agreements generally provide for the periodic payment of a fixed amount of rent over the life of the lease and the amount of the contracted rent will depend upon the type, age, specification and condition of the aircraft and market conditions at the time the lease is committed. The amount of rent we receive will depend on a number of factors, including the creditworthiness of our lessees and the occurrence of restructurings and defaults. Our lease rental revenues are also affected by the extent to which aircraft are off-lease and our ability to remarket aircraft that are nearing the end of their leases in order to minimize their off-lease time. Our success in re-leasing aircraft is affected by market conditions relating to our aircraft and by general industry conditions and trends. An increase in the percentage of off-lease aircraft or a reduction in lease rates upon remarketing would negatively impact our revenues.
Under an operating lease, the lessee will be responsible for performing maintenance on the relevant aircraft and will typically be required to make payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and would be made either monthly in arrears or at the end of the lease term. For maintenance payments made monthly in arrears during a lease term, we will typically be required to reimburse all or a portion of these payments to the lessee upon their completion of the relevant heavy maintenance, overhaul or parts replacement. We record maintenance payments paid by the lessee during a lease as accrued maintenance liabilities in recognition of our obligation in the lease to refund such payments, and therefore we do not recognize maintenance revenue during the lease. Maintenance revenue recognition would occur at the end of a lease, when we are able to determine the amount, if any, by which reserve payments received exceed the amount we are required under the lease to reimburse to the lessee for heavy maintenance, overhaul or parts replacement. The amount of maintenance revenue we recognize in any reporting period is inherently volatile and is dependent upon a number of factors, including the timing of lease expiries, including scheduled and unscheduled expiries, the timing of maintenance events and the utilization of the aircraft by the lessee.
Many of our leases contain provisions which may require us to pay a portion of the lessee’s costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated cost of the maintenance event and the estimated amounts the lessee is responsible to pay.
This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease.
2016 Lease Expirations and Lease Placements
At June 30, 2016 , we had two aircraft scheduled to come off lease during 2016 for which we have not yet secured lease or sales commitments. We expect to sell one of these aircraft and are marketing the other aircraft for lease or sale. These two aircraft account for less than 1.0% of our net book value of flight equipment (including flight equipment held for lease and net investment in finance leases).





28


2017-2020 Lease Expirations and Lease Placements
Taking into account lease and sale commitments, we currently have the following number of aircraft with lease expirations scheduled in the period 2017-2020, representing the percentage of our net book value of flight equipment (including flight equipment held for lease and net investment in finance leases) at June 30, 2016 specified below:
2017: 18 aircraft, representing 11%;
2018: 12 aircraft, representing 8%;
2019: 16 aircraft, representing 10%; and
2020: 23 aircraft, representing 8%.
Operating Expenses
Operating expenses are comprised of depreciation of flight equipment held for lease, interest expense, selling, general and administrative expenses, aircraft impairment charges and maintenance and other costs. Because our operating lease terms generally require the lessee to pay for operating, maintenance and insurance costs, our portion of maintenance and other costs relating to aircraft reflected in our statement of income primarily relates to expenses for unscheduled lease terminations.
Income Tax Provision
We have obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not, until March 2035, be applicable to us or to any of our operations or to our shares, debentures or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. Consequently, the provision for income taxes recorded relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily Ireland, Singapore and the United States.
All of our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are non-U.S. corporations. These non-U.S. subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes, unless they operate within the U.S., in which case they may be subject to federal, state and local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius and Singapore are subject to tax in those respective jurisdictions.
We have a U.S.-based subsidiary which provides management services to our non-U.S. subsidiaries and is subject to U.S. federal, state and local income taxes. We also have Ireland and Singapore based subsidiaries which provide management services to our non-U.S. subsidiaries and are subject to tax in those respective jurisdictions.
Acquisitions and Sales
During the first six months of 2016, we acquired 22 aircraft for $658.3 million . At June 30, 2016 , we had commitments to acquire 37 additional aircraft for $1.40 billion , including the acquisition of 25 new E-Jet E-2 aircraft from Embraer. As of July 29, 2016, we have commitments to acquire 35 aircraft for $ 1.29 billion .
During the first six months of 2016, we sold fourteen aircraft and other flight equipment for $339.5 million, which resulted in a net gain of $15.0 million.

29


The following table sets forth certain information with respect to the aircraft owned by us as of June 30, 2016 :
AIRCASTLE AIRCRAFT INFORMATION (dollars in millions)
Owned Aircraft
As of
June 30, 
2016 (1)
 
As of
June 30, 
2015 (1)
Flight Equipment
$
6,168

 
$
6,076

Unencumbered Flight Equipment (2)
$
4,499

 
$
3,705

Number of Aircraft
169

 
161

Number of Unencumbered Aircraft (2)
142

 
110

Number of Lessees
63

 
52

Number of Countries
35

 
32

Weighted Average Age (years) (3)
7.7

 
8.0

Weighted Average Remaining Lease Term (years)