SEC Filing | Aircastle Limited

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________________________

FORM 10-Q

_______________________________________________________________



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020



☐	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
201 Tresser Boulevard, Suite 400
Stamford
Connecticut
06901
(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (203) 504-1020

_______________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Shares, par value $0.01 per share	N/A	NONE

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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of May 8, 2020, there were 14,048 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.
	PART I. – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019	3
	Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three months ended March 31, 2020 and 2019	4
	Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2020 and 2019	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4.	Controls and Procedures	38
	PART II. – OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
SIGNATURE		45

PART I. — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Aircastle Limited and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)



	March 31, 2020		December 31, 2019
	(Unaudited)
ASSETS
Cash and cash equivalents	$	667,845	$	140,882
Restricted cash and cash equivalents	5,354		14,561
Accounts receivable	51,033		18,006
Flight equipment held for lease, net of accumulated depreciation of $1,570,125 and $1,501,664, respectively	7,144,108		7,375,018
Net investment in leases, net of allowance for credit losses of $9,865 and $0, respectively	420,464		419,396
Unconsolidated equity method investments	33,688		32,974
Other assets	211,918		201,209
Total assets	$	8,534,410	$	8,202,046

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Borrowings from secured financings, net of debt issuance costs and discounts	$	999,109	$	1,129,345
Borrowings from unsecured financings, net of debt issuance costs and discounts	4,435,107		3,932,491
Accounts payable, accrued expenses and other liabilities	173,860		172,114
Lease rentals received in advance	99,142		108,060
Security deposits	110,394		124,954
Maintenance payments	690,208		682,398
Total liabilities	6,507,820		6,149,362

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, 14,048 shares issued and outstanding at March 31, 2020; and 75,122,129 shares issued and outstanding at December 31, 2019	—		751
Additional paid-in capital	1,485,777		1,446,664
Retained earnings	540,813		605,269
Total shareholders’ equity	2,026,590		2,052,684
Total liabilities and shareholders’ equity	$	8,534,410	$	8,202,046

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

(Dollars in thousands)

(Unaudited)



	Three Months Ended March 31,
	2020			2019
Revenues:
Lease rental revenue	$	198,920		$	181,234
Direct financing and sales-type lease revenue	6,766			8,443
Amortization of lease premiums, discounts and incentives	(5,696		)	(5,711		)
Maintenance revenue	46,552			16,401
Total lease revenue	246,542			200,367
Gain on sale of flight equipment	27,049			12,002
Other revenue	8,907			1,558
Total revenues	282,498			213,927

Operating expenses:
Depreciation	89,705			84,735
Interest, net	61,507			63,463
Selling, general and administrative (including non-cash share-based payment expense of $38,727 and $2,726 for the three months ended March 31, 2020 and 2019, respectively)	62,382			18,000
Impairment of flight equipment	62,657			—
Maintenance and other costs	4,756			7,404
Total operating expenses	281,007			173,602

Other expense:
Loss on extinguishment of debt	(3,955		)	—
Merger expenses	(32,210		)	—
Other	(112		)	(2,061		)
Total other expense	(36,277		)	(2,061		)

Income (loss) from continuing operations before income taxes and earnings (loss) of unconsolidated equity method investments	(34,786		)	38,264
Income tax provision	149			3,098
Earnings (loss) of unconsolidated equity method investments, net of tax	714			(356		)
Net income (loss)	$	(34,221	)	$	34,810

Other comprehensive income (loss), net of tax:
Net derivative loss reclassified into earnings	—			184
Other comprehensive income	—			184
Total comprehensive income (loss)	$	(34,221	)	$	34,994

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)



	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities:
Net income (loss)	$	(34,221	)	$	34,810
Adjustments to reconcile net income (loss) to net cash and restricted cash provided by operating activities:
Depreciation	89,705			84,735
Amortization of deferred financing costs	3,581			3,364
Amortization of lease premiums, discounts and incentives	5,696			5,711
Deferred income taxes	6,857			3,164
Non-cash share-based payment expense	38,727			2,726
Collections on net investment in leases	8,138			5,925
Security deposits and maintenance payments included in earnings	(47,284		)	(14,975		)
Gain on sale of flight equipment	(27,049		)	(12,002		)
Loss on extinguishment of debt	3,955			—
Impairment of flight equipment	62,657			—
Provision for credit losses	3,595			—
Other	(601		)	1,797
Changes in certain assets and liabilities:
Accounts receivable	(24,683		)	(3,662		)
Other assets	(7,941		)	(1,030		)
Accounts payable, accrued expenses and other liabilities	(3,127		)	(7,337		)
Lease rentals received in advance	(8,788		)	3,134
Net cash and restricted cash provided by operating activities	69,217			106,360
Cash flows from investing activities:
Acquisition and improvement of flight equipment	(49,129		)	(355,817		)
Proceeds from sale of flight equipment	150,040			56,307
Aircraft purchase deposits and progress payments, net of returned deposits and aircraft sales deposits	(8,451		)	19,697
Unconsolidated equity method investments and associated costs	—			(7,551		)
Other	(56		)	1,118
Net cash and restricted cash provided by (used in) investing activities	92,404			(286,246		)
Cash flows from financing activities:
Repurchase of shares	(27,906		)	(11,424		)
Parent contribution at Merger	25,536			—
Proceeds from secured and unsecured debt financings	650,000			215,000
Repayments of secured and unsecured debt financings	(282,470		)	(76,131		)
Debt extinguishment costs	(2,685		)	—
Deferred financing costs	—			(1,921		)
Security deposits and maintenance payments received	37,504			45,149
Security deposits and maintenance payments returned	(19,819		)	(27,914		)
Dividends paid	(24,025		)	(22,518		)
Net cash and restricted cash provided by financing activities	356,135			120,241
Net increase in cash and restricted cash:	517,756			(59,645		)
Cash and restricted cash at beginning of period	155,443			167,853

Cash and restricted cash at end of period	$	673,199		$	108,208

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(Dollars in thousands)

(Unaudited)



	Three Months Ended March 31,
	2020		2019
Reconciliation to Consolidated Balance Sheets:
Cash and cash equivalents	$	667,845	$	92,629
Restricted cash and cash equivalents	5,354		15,579

Unrestricted and restricted cash and cash equivalents	$	673,199	$	108,208

Supplemental disclosures of cash flow information:
Cash paid for interest	$	55,295	$	54,673
Cash paid (received) for income taxes	$	127	$	(858	)
Supplemental disclosures of non-cash investing activities:
Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets assumed in asset acquisitions	$	37,742	$	22,355
Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets settled in sale of flight equipment	$	16,927	$	10,877
Transfers from flight equipment held for lease to Net investment in leases and Other assets	$	31,821	$	42,709

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except share amounts)

(Unaudited)



	Three Months Ended March 31, 2020
						Additional Paid-In Capital			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Common Shares
	Shares		Amount
Balance, December 31, 2019	75,122,129		$	751		$	1,446,664		$	605,269		$	—		$	2,052,684
Issuance of common shares to directors and employees	28,568		1			(1		)	—			—			—
Repurchase of common shares from stockholders, directors and employees	(73,903	)	(1		)	(2,369		)	—			—			(2,370		)
Amortization of share-based payments	—		—			38,727			—			—			38,727
Reclassification of prior year director stock award liability	—		—			2,005			—			—			2,005
Dividends declared	—		—						(24,025		)	—			(24,025		)
Net loss	—		—			—			(34,221		)	—			(34,221		)
Adoption of accounting standard	—		—			—			(6,210		)	—			(6,210		)
Payment of unvested shares at Merger	(101,809	)	(1		)	(25,535		)	—			—			(25,536		)
Parent contribution at Merger	—		—			25,536			—			—			25,536
Share cancellation and re-issuance at Merger	(74,960,937	)	(750		)	750			—			—			—

Balance, March 31, 2020	14,048		$	—		$	1,485,777		$	540,813		$	—		$	2,026,590


	Three Months Ended March 31, 2019
						Additional Paid-In Capital			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Common Shares
	Shares		Amount
Balance, December 31, 2018	75,454,511		$	754		$	1,468,779		$	539,332		$	(184	)	$	2,008,681
Issuance of common shares to directors and employees	276,923		3			(3		)	—			—			—
Repurchase of common shares from stockholders, directors and employees	(653,796	)	(6		)	(11,418		)	—			—			(11,424		)
Amortization of share-based payments	—		—			2,410			—			—			2,410
Reclassification of prior year director stock award liability	—		—			796			—			—			796
Dividends declared	—		—			—			(22,518		)	—			(22,518		)
Net income	—		—			—			34,810			—			34,810
Net derivative loss reclassified into earnings	—		—			—			—			184			184

Balance, March 31, 2019	75,077,638		$	751		$	1,460,564		$	551,624		$	—		$	2,012,939

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

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

March 31, 2020

Note 1. Summary of Significant Accounting Policies

Organization and Basis of Presentation

Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is acquiring, leasing, managing and selling commercial jet aircraft.

On March 27, 2020, the Company successfully completed its merger (the “Merger”) with MM Air Merger Sub Limited, a Bermuda exempted company (“Merger Sub”), pursuant to the Agreement and Plan of Merger, dated as of November 5, 2019 (the “Merger Agreement”), by and among the Company, MM Air Limited, a Bermuda exempted company (“Parent”), and Merger Sub. As a result of the Merger, Aircastle’s shareholders (other than Marubeni Corporation and its affiliates) received cash consideration of $32.00 per common share and the Company is now controlled by affiliates of Marubeni Corporation and Mizuho Leasing Company, Limited (“Mizuho Leasing”).

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 the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Effective January 1, 2020, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 326, Financial Instruments - Credit Losses (“ASC 326”). The standard applies to entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The standard affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and other financial assets not excluded from the scope that have the contractual right to receive cash. Net investment in leases comprised the Company’s financial asset principally affected by the standard. Operating lease receivables are not within the scope of ASC 326.

Upon the Company’s adoption of ASC 326, our net investment in leases was recorded in the consolidated financial statements net of an allowance for credit losses. This allowance for credit losses reflects the Company’s estimate of lessee default probabilities and loss given default percentages. The estimate of expected credit losses considers relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of reported amounts. Our allowance also considers the potential loss due to non-credit risk related to unguaranteed residual values. We adopted the standard using the “modified retrospective” approach with a January 1, 2020 adjustment to the opening balance of retained earnings. The adoption of the standard did not have a material impact on our consolidated financial statements or related disclosures.

Effective January 1, 2020, the Company adopted, the FASB Accounting Standard Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The standard modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The adoption of the standard did not have a material impact on our consolidated financial statements or related disclosures.

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

March 31, 2020

Effective January 1, 2020, the Company adopted the FASB ASU No. 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use-software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. The adoption of the standard did not have a material impact on our consolidated financial statements or related disclosures.

Effective January 1, 2020, the Company adopted the FASB ASU No. 2018-17, Consolidation (Topic 810), Targeted Improvements to Related Party Guidance for Variable Interest Entities. The standard changes how all entities evaluate decision-making fees under the variable interest entity guidance. The standard is applied retrospectively with a cumulative- effect adjustment to retained earnings at the beginning of the earliest period presented. The adoption of the standard did not have a material impact on our consolidated financial statements or related disclosures.

The Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure subsequent to the balance sheet date of March 31, 2020, through the date on which the consolidated financial statements included in this Form 10-Q were issued.

Principles of Consolidation

The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates four 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.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. While Aircastle believes the estimates and related assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates.

Lease Revenue Recognition

We lease flight equipment under net operating leases with lease terms typically ranging from three to seven years. We generally do not offer renewal terms or purchase options in our leases, although certain of our operating leases allow the lessee the option to extend the lease for an additional term. Operating leases with fixed rentals and step rentals are recognized on a straight-line basis over the term of the initial lease, assuming no renewals. Operating lease rentals that adjust based on a London Interbank Offered Rate (“LIBOR”) index are recognized on a straight-line basis over the lease term using the prevailing rate at lease commencement. Changes to rate-based lease rentals are recognized in the statements of income (loss) in the period of change. Revenue is not recognized when collection is not probable. When collectability is not probable, the customer is placed on non-accrual status, and revenue is recognized when cash payments are received.

In certain instances, we may provide lease concessions to customers, generally in the form of lease rental deferrals. While these deferral arrangements affect the timing of lease rental payments, the total amount of lease rental payments required over the lease term is generally the same as that which was required under the original lease agreement. We account for the deferrals as if no modifications to the lease agreements were made and record the deferred rentals as a receivable

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

March 31, 2020

within Other assets in our consolidated balance sheet. We continue to recognize lease rental revenue for such receivables to the extent collectability is probable.

The COVID-19 virus has had an unprecedented negative impact on the global economy, and in particular on the aviation sector. There has been a dramatic slowdown in air traffic, with many markets in near complete shutdown. According to IATA air travel is down to approximately 20% of normal levels and a recovery to pre-pandemic levels is not expected for several years. Substantially all of the world’s airlines are experiencing financial difficulties and liquidity challenges. While we believe the long-term demand for air travel will return to historical trends over time, the near-term impacts of the COVID-19 virus’ economic shock are material; the extent and duration of which cannot currently be determined.

Airlines have been seeking to preserve liquidity through a combination of requesting government support, raising debt and equity, delaying or canceling new aircraft orders, furloughing employees, as well as requesting deferrals from lessors. We have agreed to defer near-term lease payments with certain of our airline customers, which they are obliged to repay over time. As of May 7, 2020, we have agreed to defer approximately $70,000 in near-term lease payments with 35 airlines, including $18,545 that appear in our Consolidated Balance Sheet as components of Accounts receivable, Net investment in leases, or Other assets as of March 31, 2020. If air traffic remains depressed over an extended period and if our customers are unable to obtain sufficient funds from private, governmental or other sources, we may need to extend further deferrals to some of our other customers or to extend the deferrals we have already made. We may ultimately not be able to collect all the amounts we have deferred.

Net Investment in Leases

If a lease meets specific criteria at lease commencement or at the effective date of a lease modification, we recognize the lease as a direct financing or sales-type lease. The net investment in direct financing and sales- type leases consists of the lease receivable, estimated unguaranteed residual value of the lease flight equipment at lease-end and, for direct financing leases, deferred selling profit. For sales-type leases, we recognize the difference between the net book value of the aircraft and the net investment in the lease as a gain or loss on sale of flight equipment. Selling profit on a direct financing lease is deferred and amortized over the lease term, and a selling loss is recognized at lease commencement. Interest income on our net investment in leases is recognized as Direct financing and sales-type leases revenue over the lease term in a manner that produced a constant rate of return on the net investment in the lease.

The net investment in leases is recorded in the consolidated financial statements net of an allowance for credit losses. The allowance for credit losses is recorded upon the initial recognition of the net investment in the lease based on the Company’s estimate of expected credit losses over the lease term. The allowance reflects the Company’s estimate of lessee default probabilities and loss given default percentages. When determining the credit loss allowance, we consider relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the net investment in the lease. The allowance also considers potential losses due to non-credit risk related to unguaranteed residual values. A provision for credit losses is recorded as a component of Selling, general, and administrative expenses in the consolidated statement of income (loss) to adjust the allowance for changes to management’s estimate of expected credit losses.

Recent Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard applies to entities that have contracts, such as debt agreements, lease agreements or derivative instruments, which reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Entities can elect not to apply certain modification accounting requirements for contract modifications that replace a reference rate affected by reference rate reform. If elected, such contracts are accounted for as a continuation of the existing contract and no reassessments or remeasurements are required. The standard is effective for all entities from March 12, 2020 through December 31, 2022, and does not apply to contract modifications made after December 31, 2022. We have not adopted ASC 848 for this interim period and are currently evaluating the election available to us under the standard and the impact it may have on our financial statements.

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

March 31, 2020

In April 2020, the FASB Staff issued a question-and-answer document (the “Q&A”) regarding accounting for lease concessions related to the effects of the COVID-19 pandemic. The Q&A provides that entities may elect to apply or not apply the lease modification guidance in ASC 842, “Leases”, for lease concessions provided by lessors as a result of the COVID-19 pandemic. The Company has elected not to apply the lease modification guidance in ASC 842 for such lease concessions - see “Lease Revenue Recognition” above.

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.


•	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 as of March 31, 2020 and December 31, 2019 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.



			Fair Value Measurements at March 31, 2020 Using Fair Value Hierarchy
	Fair Value as of 3/31/2020		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	$	667,845	$	667,845	$	—	$	—	Market
Restricted cash and cash equivalents	5,354		5,354		—		—		Market
Derivative assets	1		—		1		—		Market
Total	$	673,200	$	673,199	$	1	$	—

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

March 31, 2020



			Fair Value Measurements at December 31, 2019 Using Fair Value Hierarchy
	Fair Value as of 12/31/2019		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	$	140,882	$	140,882	$	—	$	—	Market
Restricted cash and cash equivalents	14,561		14,561		—		—		Market
Derivative assets	115		—		115		—		Market
Total	$	155,558	$	155,443	$	115	$	—

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 derivative included in Level 2 consists of United States dollar-denominated interest rate cap, and its fair value is based on the market comparisons for similar instruments. We also considered the credit rating and risk of the counterparty providing the interest rate cap based on quantitative and qualitative factors.

For the three months ended March 31, 2020 and the year ended December 31, 2019, 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 unconsolidated joint ventures and aircraft. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft in impairment tests are based on an income approach that uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft.

We account for our investment in unconsolidated joint ventures under the equity method of accounting. Investments are recorded at cost and are adjusted by undistributed earnings and losses and the distributions of dividends and capital. These investments are also reviewed for impairment whenever events or circumstances indicate the fair value is less than its carrying value and the decline is other-than-temporary.

Aircraft Valuation

Transactional Impairments

In February 2020, the Company initiated a process to accept the redelivery of four Airbus A330-200 aircraft on lease to South African Airways prior to their scheduled lease expirations due to lessee default (the “South African Airways Transaction”). As a result, the Company recognized impairment charges of $62,657 and recorded $38,804 of maintenance revenue, $5,863 of lease rentals received in advance and $8,740 of security deposits into revenue during the first quarter of 2020.

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 value of our senior notes is estimated using quoted market prices. The fair values of all our other financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements.

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

March 31, 2020

The carrying amounts and fair values of our financial instruments at March 31, 2020 and December 31, 2019 were as follows:



	March 31, 2020				December 31, 2019
	Carrying Amount of Liability		Fair Value of Liability		Carrying Amount of Liability		Fair Value of Liability
Credit Facilities	$	650,000	$	638,866	$	150,000	$	150,000
Unsecured Term Loan	215,000		208,597		215,000		215,000
ECA Financings	48,994		51,229		147,644		150,805
Bank Financings	959,772		953,451		993,593		1,010,482
Senior Notes	3,600,000		3,291,610		3,600,000		3,787,268

All of our financial instruments are classified as Level 2 with the exception of our Senior Notes, which are classified as Level 1.

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

March 31, 2020

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 March 31, 2020 were as follows:



Year Ending December 31,	Amount
Remainder of 2020	$	551,433
2021	672,070
2022	592,544
2023	512,637
2024	401,032
Thereafter	476,472
Total	$	3,206,188

Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:



	Three Months Ended March 31,
Region