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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 November 30, 2020
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)
_______________________________________________________________
Bermuda98-0444035
(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 filerAccelerated filer
Non-accelerated filerSmaller 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 January 8, 2021, 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.
Item 1.
Consolidated Balance Sheets as of November 30, 2020, August 31, 2020 and February 29, 2020
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the two months ended August 31, 2020 and 2019, and the three and nine months ended November 30, 2020 and 2019
Consolidated Statements of Cash Flows for the nine months ended November 30, 2020 and 2019
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)
(Unaudited)
November 30,
2020
August 31,
2020
February 29,
2020
ASSETS
Cash and cash equivalents$416,621 $514,917 $166,083 
Restricted cash and cash equivalents5,341 5,353 5,354 
Accounts receivable85,141 68,584 27,269 
Flight equipment held for lease, net of accumulated depreciation of $1,939,501, $1,870,242 and $1,542,938, respectively6,666,574 6,804,232 7,142,987 
Net investment in leases, net of allowance for credit losses of $3,714, $2,972 and $6,558, respectively312,038 317,064 426,252 
Unconsolidated equity method investments35,448 34,876 33,470 
Other assets271,237 247,472 206,617 
Total assets$7,792,400 $7,992,498 $8,008,032 
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Borrowings from secured financings, net of debt issuance costs and discounts$937,603 $962,659 $1,012,518 
Borrowings from unsecured financings, net of debt issuance costs and discounts4,130,141 4,277,766 3,884,235 
Accounts payable, accrued expenses and other liabilities191,437 182,609 207,114 
Lease rentals received in advance55,480 68,341 107,944 
Security deposits82,706 90,102 109,663 
Maintenance payments568,135 586,835 650,369 
Total liabilities5,965,502 6,168,312 5,971,843 
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 November 30 and August 31, 2020; and 75,076,794 shares issued and outstanding at February 29, 2020  751 
Additional paid-in capital1,485,777 1,485,777 1,456,977 
Retained earnings341,121 338,409 578,461 
Total shareholders’ equity1,826,898 1,824,186 2,036,189 
Total liabilities and shareholders’ equity$7,792,400 $7,992,498 $8,008,032 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3


Aircastle Limited and Subsidiaries
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Dollars in thousands)
(Unaudited)
Two Months Ended August 31,Three Months Ended November 30,Nine Months Ended November 30,
202020192020201920202019
Revenues:
Lease rental revenue$93,891 $136,156 $139,493 $199,847 $473,566 $588,141 
Direct financing and sales-type lease revenue3,208 5,543 4,839 7,760 14,903 24,407 
Amortization of lease premiums, discounts and incentives(3,544)(3,835)(5,384)(5,819)(17,360)(17,077)
Maintenance revenue 19,158 (644)24,843 15,360 121,508 55,807 
Total lease revenue112,713 137,220 163,791 217,148 592,617 651,278 
Gain (loss) on sale of flight equipment(185)4,448 12,951 26,512 24,181 39,134 
Other revenue1,019 2,276 4,169 5,215 17,962 9,370 
Total revenues113,547 143,944 180,911 248,875 634,760 699,782 
Operating expenses:
Depreciation57,993 60,703 86,845 90,737 262,806 269,689 
Interest, net37,355 44,071 59,945 63,204 173,996 194,952 
Selling, general and administrative (including non-cash share-based payment expense of $0 and $2,283 for the two months ended August 31, 2020 and 2019, $0 and $3,209 for the three months ended November 30, 2020 and 2019, and $28,049 and $9,793 for the nine months ended November 30, 2020 and 2019, respectively)8,249 11,999 15,145 18,389 76,152 55,060 
Impairment of flight equipment9,596  9,867  299,551 7,404 
Maintenance and other costs2,544 2,911 4,207 6,696 14,044 18,744 
Total operating expenses115,737 119,684 176,009 179,026 826,549 545,849 
Other expense:
Loss on extinguishment of debt (7,577)(43) (108)(7,577)
Merger expenses67  (450)(3,044)(32,492)(3,044)
Other(173)(193) (198)(191)(3,987)
Total other expense(106)(7,770)(493)(3,242)(32,791)(14,608)
Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investments(2,296)16,490 4,409 66,607 (224,580)139,325 
Income tax provision9,325 1,283 2,269 7,659 14,738 17,280 
Earnings of unconsolidated equity method investments, net of tax426 1,160 572 601 1,978 2,281 
Net income (loss)$(11,195)$16,367 $2,712 $59,549 $(237,340)$124,326 
Total comprehensive income (loss)$(11,195)$16,367 $2,712 $59,549 $(237,340)$124,326 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
3


Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended November 30,
20202019
Cash flows from operating activities:
Net income (loss)$(237,340)$124,326 
Adjustments to reconcile net income (loss) to net cash and restricted cash provided by operating activities:
Depreciation262,806 269,689 
Amortization of deferred financing costs10,642 11,105 
Amortization of lease premiums, discounts and incentives17,360 17,077 
Deferred income taxes12,109 10,512 
Non-cash share-based payment expense28,049 9,793 
Collections on net investment in leases12,953 19,081 
Security deposits and maintenance payments included in earnings(107,732)(40,496)
Gain on sale of flight equipment(24,181)(39,134)
Loss on extinguishment of debt108 7,577 
Impairment of flight equipment299,551 7,404 
Provision for credit losses5,255  
Other(1,991)219 
Changes in certain assets and liabilities:
Accounts receivable(55,946)(6,516)
Other assets(40,780)6,689 
Accounts payable, accrued expenses and other liabilities(1,875)(2,951)
Lease rentals received in advance(54,608)16,604 
Net cash and restricted cash provided by operating activities124,380 410,979 
Cash flows from investing activities:
Acquisition and improvement of flight equipment(134,263)(953,170)
Proceeds from sale of flight equipment113,588 345,318 
Aircraft purchase deposits and progress payments, net of returned deposits and aircraft sales deposits(4,083)(13,093)
Unconsolidated equity method investments and associated costs (11,681)
Other(594)3,572 
Net cash and restricted cash used in investing activities(25,352)(629,054)
Cash flows from financing activities:
Repurchase of shares(25,536)(9,873)
Parent contribution at Merger25,536  
Proceeds from secured and unsecured debt financings1,193,871 2,141,848 
Repayments of secured and unsecured debt financings(1,027,164)(1,814,686)
Debt extinguishment costs(108)(7,183)
Deferred financing costs(6,358)(13,343)
Security deposits and maintenance payments received63,443 149,195 
Security deposits and maintenance payments returned(48,162)(81,351)
Dividends paid(24,025)(67,453)
Net cash and restricted cash provided by financing activities151,497 297,154 
Net increase in cash and restricted cash:250,525 79,079 
Cash and restricted cash at beginning of period171,437 133,299 
Cash and restricted cash at end of period$421,962 $212,378 

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

4


Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)
Nine Months Ended November 30,
20202019
Reconciliation to Consolidated Balance Sheets:
Cash and cash equivalents$416,621 $197,817 
Restricted cash and cash equivalents5,341 14,561 
Unrestricted and restricted cash and cash equivalents$421,962 $212,378 
Supplemental disclosures of cash flow information:
Cash paid for interest$176,284 $204,951 
Cash paid for income taxes$1,244 $995 
Supplemental disclosures of non-cash investing activities:
Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets assumed in asset acquisitions$29,869 $28,862 
Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets settled in sale of flight equipment$45,443 $62,751 
Transfers from flight equipment held for lease to Net investment in leases and Other assets
$6,584 $62,129 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
5


Aircastle Limited and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share amounts)
(Unaudited)
Additional
Paid-In
Capital
Retained
Earnings
Total
Shareholders’
Equity
 Common Shares
SharesAmount
Balance, February 29, 202075,076,794 $751 $1,456,977 $578,461 $2,036,189 
Amortization of share-based payments— — 28,049 — 28,049 
Net loss— — — (228,857)(228,857)
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, June 30, 202014,048  1,485,777 349,604 1,835,381 
Net loss— — — (11,195)(11,195)
Balance, August 31, 202014,048  1,485,777 338,409 1,824,186 
Net income— — — 2,712 2,712 
Balance, November 30, 202014,048 $ $1,485,777 $341,121 $1,826,898 
Additional
Paid-In
Capital
Retained
Earnings
(Deficit)
Total
Shareholders’
Equity
Common Shares
SharesAmount
Balance, February 28, 201975,066,346 $751 $1,458,783 $534,333 $1,993,867 
Issuance of common shares to directors and employees56,043   —  
Repurchase of common shares from stockholders, directors and employees(139,275)(1)(2,863)— (2,864)
Amortization of share-based payments— — 3,818 — 3,818 
Reclassification of prior year director stock award liability— — 796 — 796 
Dividends declared— — — (22,543)(22,543)
Net income— — — 48,410 48,410 
Balance, June 30, 201974,983,114 750 1,460,534 560,200 2,021,484 
Repurchase of common shares from stockholders, directors and employees(347,784)(4)(7,005)— (7,009)
Amortization of share-based payments— — 2,100 — 2,100 
Dividends declared— — — (22,485)(22,485)
Net income— — — 16,367 16,367 
Balance, August 31, 201974,635,330 746 1,455,629 554,082 2,010,457 
Amortization of share-based payments— — 2,821 — 2,821 
Dividends declared— — — (23,789)(23,789)
Net income— — — 59,549 59,549 
Balance, November 30, 201974,635,330 $746 $1,458,450 $589,842 $2,049,038 


The accompanying notes are an integral part of these unaudited consolidated financial statements.
6

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 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”) and is now controlled by affiliates of Marubeni Corporation and Mizuho Leasing Company, Limited (“Mizuho Leasing”).
As previously disclosed, on September 30, 2020, the Company’s Board of Directors unanimously agreed to change the Company’s fiscal year end to the twelve-month period ending on the last day in February. This change better aligns the Company’s financial reporting period with the financial reporting cycle of its shareholders, Marubeni Corporation and Mizuho Leasing.
Aircastle is a holding company that conducts its business through subsidiaries. Aircastle directly or indirectly owns all outstanding common shares of its subsidiaries. The consolidated financial statements presented are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The Company manages, analyzes and reports on its business and results of operations based on one operating segment: leasing, financing, selling and managing commercial flight equipment. Our Chief Executive Officer is the chief operating decision maker.
The accompanying consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, in our opinion, reflect all adjustments, including normal recurring items, which are necessary to present fairly the results for interim periods. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. However, we believe that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as amended, and the Company’s Transition Report on Form 10-Q for the two months ended February 29, 2020.
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 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
7

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2020
or related disclosures.
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 November 30, 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 its subsidiaries. Aircastle consolidates two 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.
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
8

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2020
account for the deferrals as if no modifications to the lease agreements were made and record the deferred rentals as a receivable within Other assets in our Consolidated Balance Sheets.
If we determine that the collectability of rental payments is no longer probable (including any deferral thereof), we recognize lease rental revenue using a cash basis of accounting rather than an accrual method. In the period we conclude that collection of lease payments is no longer probable, we recognize any difference between revenue amounts recognized to date under the accrual method and payments that have been collected from the lessee, including security deposit amounts held, as a current period adjustment to lease rental revenue.
The COVID-19 virus has had an unprecedented negative impact on the global economy, and in particular on the aviation sector. As a result of COVID-19, there has been a dramatic slowdown in air traffic, with many markets in near complete shutdown. According to the International Air Transport Association (“IATA”), as of November 2020, air travel was down to approximately 34% of normal levels and a full recovery to pre-pandemic levels is not expected for several years. Substantially all 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 January 8, 2021, we have agreed to defer approximately $101,000 in near-term lease payments, including $76,460 that appear in our Consolidated Balance Sheets as components of Accounts receivable, Net investment in leases, or Other assets as of November 30, 2020. This represents approximately 15% of Lease rental and Direct financing and sales-type lease revenues for the twelve months ended November 30, 2020. Deferrals have been agreed to with 37 airlines, representing 46% of our customer base, and for an average deferral of five months of lease rentals. In certain situations, we have agreed to broader restructurings of contractual terms, for example obtaining better security packages, term extensions, or other valuable considerations in exchange for short-term economic concessions.
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 grant additional deferrals to our customers or extend the periods of repayment for deferrals we have already made. We may ultimately not be able to collect all the amounts we have deferred.
As of January 8, 2021, seven of our customers are subject to judicial insolvency proceedings or similar protection. We lease 22 aircraft to these customers, which comprise 13% of our net book value of flight equipment (including Flight equipment held for lease and Net investment in leases) and 11% of our Lease rental and direct financing and sales-type lease revenue as of and for the twelve months ended November 30, 2020. One of these customers is LATAM, our second largest customer, which represents 7% of our net book value of flight equipment and 6% of our Lease rental revenue as of and for the twelve months ended November 30, 2020. Based on historic experience, the judicial process can take anywhere from twelve months to eighteen months to be resolved. We are actively engaged in the various judicial proceedings to protect our economic interests. As a result of these proceedings, the recognition of lease rental revenue for certain customers may be done on a cash basis of accounting rather than the accrual method depending on the customers lease security arrangements.
Impairment of Flight Equipment
We perform a recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis annually during the second quarter. In addition, a recoverability assessment is performed whenever events or changes in circumstances, or indicators, suggest that the carrying amount or net book value of an asset may not be recoverable. Indicators may include, but are not limited to, a significant lease restructuring or early lease termination, significant change in aircraft model’s storage levels, the introduction of newer technology aircraft or engines, an aircraft type is no longer in production or a significant airworthiness directive is issued. When we perform a recoverability assessment, we measure whether the estimated future undiscounted net cash flows expected to be generated by the aircraft exceed its net book value. The undiscounted cash flows consist of cash flows from currently contracted lease rental and maintenance
9

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2020
payments, future projected lease rates, transition costs, estimated down time, estimated residual or scrap values for an aircraft, economic conditions and other factors. In the event that an aircraft does not meet the recoverability test, the aircraft will be adjusted to fair value, resulting in an impairment charge. See Note 2 – Fair Value Measurements.
Management develops the assumptions used in the recoverability analysis based on current and future expectations of the global demand for a particular aircraft type and historical experience in the aircraft leasing market and aviation industry, as well as information received from third party industry sources. The factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in projected lease rental and maintenance payments, residual values, economic conditions, technology, airline demand for a particular aircraft type and other factors.
We are closely monitoring the impact of the COVID-19 virus on our customers, air traffic, lease rental rates, and aircraft valuations, and will perform additional customer and aircraft specific reviews should changes in facts and circumstances arise that may impact the recoverability of our aircraft.  We will focus on our customers that have entered judicial insolvency proceedings and any additional customers that may become subject to similar-type proceedings, aircraft with near-term lease expirations, and certain aircraft variants that are more susceptible to the impact of COVID-19 and value deteriorations.
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 produces 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 our Consolidated Statements 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 re-measurements 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.
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
10

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2020
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 November 30, 2020, August 31, 2020 and February 29, 2020 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
  Fair Value Measurements at November 30, 2020
Using Fair Value Hierarchy
 Fair Value as of November 30, 2020Quoted 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$416,621 $416,621 $ $ Market
Restricted cash and cash equivalents5,341 5,341   Market
Total$421,962 $421,962 $ $ 

  Fair Value Measurements at August 31, 2020
Using Fair Value Hierarchy
 Fair Value as of August 31, 2020Quoted 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$514,917 $514,917 $ $ Market
Restricted cash and cash equivalents5,353 5,353   Market
Total$520,270 $520,270 $ $ 
11

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2020
  Fair Value Measurements at February 29, 2020
Using Fair Value Hierarchy
 Fair Value as of February 29, 2020Quoted 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$166,083 $166,083 $ $ Market
Restricted cash and cash equivalents5,354 5,354   Market
Derivative assets19  19  Market
Total$171,456 $171,437 $19 $ 
Our cash and cash equivalents, along with our restricted cash and cash equivalents balances, consist largely of money market securities that are highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy. Our interest rate derivative included in Level 2 consists of a 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 two months ended August 31, 2020 and 2019, and the three and nine months ended November 30, 2020, we had no transfers into or out of Level 3.
We measure the fair value of certain assets and liabilities on a non-recurring basis, when U.S. GAAP requires the application of fair value, including events or changes in circumstances that indicate the carrying amounts of these assets may not be recoverable. Assets subject to these measurements include our investment in unconsolidated joint ventures and aircraft. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft in impairment tests are based on the average of the market approach that uses Level 2 inputs, which include third party appraisal data and an income approach that uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft discounted using the Company’s weighted average cost of capital.
We account for our investment in unconsolidated joint ventures under the equity method of accounting. Investments are recorded at cost and are adjusted by undistributed earnings and losses and the distributions of dividends and capital. These investments are also reviewed for impairment whenever events or changes in circumstances indicate the fair value is less than its carrying value and the decline is other-than-temporary.
Aircraft Valuation
Impairment of Flight Equipment
For the two months ended August 31, 2020, the Company recorded transactional impairment charges of $9,596, which primarily related to one narrow-body aircraft for which the customer rejected the lease due to judicial insolvency proceedings. We also recognized $9,367 of maintenance reserves and security deposits into revenue for this one aircraft.
For the three months ended November 30, 2020, the Company recorded transactional impairment charges totaling $9,867, which primarily related to the scheduled lease expirations of two narrow-body aircraft. The Company also recognized $15,200 of maintenance revenue related to these two aircraft.
During the nine months ended November 30, 2020, the Company recorded impairment charges totaling $299,551, of which $256,510 were transactional impairments, which primarily related to thirteen narrow-body and five wide-body aircraft. The Company also recognized $107,448 of maintenance reserves and security deposits into revenue for these eighteen aircraft. The impairment charges were attributable to early lease terminations, scheduled lease expirations, lessee defaults and/or judicial insolvency proceedings, or as a result of our annual recoverability assessment – refer to the section below for additional details.
12

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 2020
Annual Recoverability Assessment
We completed our annual recoverability assessment of our aircraft in the second quarter of 2020. Of the $299,551 impairment charges recorded for the nine months ended November 30, 2020, we recorded $43,040 related to one narrow-body and one wide-body aircraft as a result of our annual recoverability assessment. Although we have completed our annual recoverability assessment, we will continue to monitor the developments of the COVID-19 virus throughout the remainder of the year. We will closely monitor the impact of the virus on our customers, air traffic, lease rental rates, and aircraft valuations, and will perform additional customer and aircraft specific reviews should changes in facts and circumstances arise that may impact the recoverability of our aircraft. We will focus on our customers that have entered judicial insolvency proceedings and any additional customers that may become subject to similar-type proceedings, aircraft with near-term lease expirations, and certain aircraft variants that are more susceptible to the impact of COVID-19 and value deterioration.
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.
If 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 annual 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 value of our senior notes is estimated using quoted market prices. The fair values of all our other financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of our financial instruments at November 30, 2020, August 31, 2020 and February 29, 2020 were as follows:
 November 30, 2020August 31, 2020February 29, 2020
 Carrying  Amount
of Liability
Fair Value
of Liability
Carrying  Amount
of Liability
Fair Value
of Liability
Carrying
Amount
of Liability
Fair Value
of Liability
Credit Facilities$ $ $150,000 $148,737 $100,000 $100,000 
Unsecured Term Loan215,000 209,784 215,000 209,326 215,000 215,000 
ECA Financings40,055 41,814 43,649 45,680 50,745 52,593 
Bank Financings905,219 903,111 927,385 925,683 971,693 1,002,620 
Senior Notes3,950,000 4,088,771 3,950,000 3,901,958 3,600,000 3,807,956 
All our financial instruments are classified as Level 2 with the exception of our Senior Notes, which are classified as Level 1.

13

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
November 30, 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 November 30, 2020 were as follows:
Year Ending February 28/29,
Amount(1)
Remainder of 2020$175,301 
2021660,667 
2022572,525 
2023500,271 
2024373,021 
Thereafter508,869 
Total$2,790,654 
_______________
(1)Reflects impact of lessee lease rental deferrals.
Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
 Two Months Ended August 31,Three Months Ended November 30,Nine Months Ended November 30,
Region202020192020201920202019
Asia and Pacific40 %44 %37 %44 %40 %44 %
Europe34 %26 %34 %25 %31 %27 %
Middle East and Africa5 %9 %6 %8 %7 %9 %
North America12 %9 %12 %10 %11 %9 %
South America9 %12 %11 %13 %11 %11 %
Total