Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 11/01/2016 16:15:07)

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 September 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 October 28, 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 September 30, 2016 and December 31, 2015
 
Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2016 and 2015
 
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015
 
Consolidated Statements of Cash Flows for the three and nine months ended September 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)

 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
656,247

 
$
155,904

Accounts receivable
5,266

 
8,566

Restricted cash and cash equivalents
54,000

 
98,137

Restricted liquidity facility collateral

 
65,000

Flight equipment held for lease, net of accumulated depreciation of $1,245,447 and $1,306,024, respectively
6,004,489

 
5,867,062

Net investment in finance and sales-type leases
265,854

 
201,211

Unconsolidated equity method investment
67,160

 
50,377

Other assets
129,840

 
123,707

Total assets
$
7,182,856

 
$
6,569,964

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Borrowings from secured financings, net of debt issuance costs
$
1,261,423

 
$
1,146,238

Borrowings from unsecured financings, net of debt issuance costs
3,286,304

 
2,894,918

Accounts payable, accrued expenses and other liabilities
144,140

 
131,058

Lease rentals received in advance
61,095

 
67,327

Liquidity facility

 
65,000

Security deposits
128,109

 
115,642

Maintenance payments
516,689

 
370,281

Total liabilities
5,397,760

 
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, 78,634,133 shares issued and outstanding at September 30, 2016; and 80,232,260 shares issued and outstanding at December 31, 2015
786

 
802

Additional paid-in capital
1,519,849

 
1,550,337

Retained earnings
268,601

 
241,574

Accumulated other comprehensive loss
(4,140
)
 
(13,213
)
Total shareholders’ equity
1,785,096

 
1,779,500

Total liabilities and shareholders’ equity
$
7,182,856

 
$
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 (Loss)
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Lease rental revenue
$
181,975

 
$
188,038

 
$
537,670

 
$
550,023

Finance and sales-type lease revenue
5,354

 
1,868

 
13,026

 
5,352

Amortization of net lease discounts and lease incentives
(521
)
 
(2,113
)
 
(5,419
)
 
(10,288
)
Maintenance revenue
6,829

 
15,726

 
20,603

 
55,148

Total lease revenue
193,637

 
203,519

 
565,880

 
600,235

Other revenue
1,015

 
8,555

 
2,425

 
10,700

Total revenues
194,652

 
212,074

 
568,305

 
610,935

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Depreciation
76,201

 
85,324

 
227,918

 
237,538

Interest, net
61,797

 
60,381

 
188,490

 
184,063

Selling, general and administrative (including non-cash share-based payment expense of $2,059 and $1,424 for the three months ended and $5,796 and $3,981 for the nine months ended September 30, 2016 and 2015, respectively)
15,985

 
14,032

 
46,883

 
42,663

Impairment of aircraft
10,462

 
78,403

 
27,185

 
102,358

Maintenance and other costs
1,834

 
2,520

 
5,504

 
9,126

Total expenses
166,279

 
240,660

 
495,980

 
575,748

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Gain (loss) on sale of flight equipment
(73
)
 
15,679

 
14,932

 
43,034

Other
(210
)
 
70

 
(136
)
 
341

Total other income (expense)
(283
)
 
15,749

 
14,796

 
43,375

 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investment
28,090

 
(12,837
)
 
87,121

 
78,562

Income tax provision
2,458

 
2,709

 
8,782

 
12,037

Earnings of unconsolidated equity method investment, net of tax
1,805

 
1,557

 
5,390

 
4,563

Net income (loss)
$
27,437

 
$
(13,989
)
 
$
83,729

 
$
71,088

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Basic:
 
 
 
 
 
 
 
Net income (loss) per share
$
0.35

 
$
(0.17
)
 
$
1.06

 
$
0.88

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Diluted:
 
 
 
 
 
 
 
Net income (loss) per share
$
0.35

 
$
(0.17
)
 
$
1.06

 
$
0.88

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.24

 
$
0.22

 
$
0.72

 
$
0.66


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

4


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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income (loss)
$
27,437

 
$
(13,989
)
 
$
83,729

 
$
71,088

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net change in fair value of derivatives, net of tax expense
of $0 and $3 for the three months ended and tax expense of $0 and $26 for the nine months ended September 30, 2016 and 2015, respectively

 
272

 
(1
)
 
708

Net derivative loss reclassified into earnings
705

 
5,006

 
9,074

 
19,349

Other comprehensive income
705

 
5,278

 
9,073

 
20,057

Total comprehensive income (loss)
$
28,142

 
$
(8,711
)
 
$
92,802

 
$
91,145



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)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
83,729

 
$
71,088

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
227,918

 
237,538

Amortization of deferred financing costs
13,567

 
11,211

Amortization of net lease discounts and lease incentives
5,419

 
10,288

Deferred income taxes
3,129

 
(1,455
)
Non-cash share-based payment expense
5,796

 
3,981

Cash flow hedges reclassified into earnings
9,074

 
19,349

Security deposits and maintenance payments included in earnings
(12,844
)
 
(20,645
)
Gain on sale of flight equipment
(14,932
)
 
(43,034
)
Impairment of aircraft
27,185

 
102,358

Other
(4,712
)
 
269

Changes in certain assets and liabilities:
 
 
 
Accounts receivable
1,699

 
253

Other assets
3,815

 
(4,382
)
Accounts payable, accrued expenses and other liabilities
16,459

 
14,085

Lease rentals received in advance
2,111

 
7,566

Net cash provided by operating activities
367,413

 
408,470

Cash flows from investing activities:
 
 
 
Acquisition and improvement of flight equipment
(792,270
)
 
(1,034,578
)
Proceeds from sale of flight equipment
488,749

 
343,020

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

 

Aircraft purchase deposits and progress payments, net of returned deposits and aircraft sales deposits
(14,035
)
 
(4,421
)
Net investment in finance and sales-type leases
(78,892
)
 
(24,000
)
Collections on finance and sales-type leases
14,413

 
6,768

Unconsolidated equity method investment and associated costs
(12,686
)
 

Other
(812
)
 
(260
)
Net cash used in investing activities
(378,533
)
 
(713,471
)
Cash flows from financing activities:
 
 
 
Repurchase of shares
(36,573
)
 
(1,960
)
Proceeds from secured and unsecured debt financings
999,350

 
800,000

Repayments of secured and unsecured debt financings
(489,134
)
 
(548,359
)
Deferred financing costs
(17,273
)
 
(12,185
)
Restricted secured liquidity facility collateral
65,000

 

Liquidity facility
(65,000
)
 

Restricted cash and cash equivalents related to financing activities
27,137

 
14,626

Security deposits and maintenance payments received
123,767

 
114,644

Security deposits and maintenance payments returned
(37,036
)
 
(28,797
)
Other
(2,073
)
 

Dividends paid
(56,702
)
 
(53,583
)
Net cash provided by financing activities
511,463

 
284,386

Net increase (decrease) in cash and cash equivalents
500,343

 
(20,615
)
Cash and cash equivalents at beginning of period
155,904

 
169,656

Cash and cash equivalents at end of period
$
656,247

 
$
149,041



6


Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2016
 
2015
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
141,653

 
$
129,696

Cash paid for income taxes
$
12,904

 
$
9,665

Supplemental disclosures of non-cash investing activities:
 
 
 
Advance lease rentals, security deposits and maintenance payments assumed in asset acquisitions
$
110,472

 
$
8,461

Advance lease rentals, security deposits, and maintenance payments settled in sale of flight equipment
$
26,671

 
$
77,624

Transfers from Flight equipment held for lease to Net investment in finance and sales-type leases and Other assets
$
140,150

 
$
21,766


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)
September 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 acquiring, leasing, managing and selling 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 September 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)
September 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 plan to adopt the standard on its required effective date of January 1, 2019. 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 plan to adopt the standard on its required effective date of January 1, 2018. The standard does not impact the accounting of our lease revenue, but may impact the accounting of our revenue other than lease revenue. While we are still performing our analysis, we do not expect the impact of this standard to be material to 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 plan to adopt the standard on its required effective date of January 1, 2017. We do not believe the standard will have a material impact on our consolidated financial statements and related disclosures.



9



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


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 and liabilities as of September 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 September 30, 2016
Using Fair Value Hierarchy
 
Fair Value as of September 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
$
656,247

 
$
656,247

 
$

 
$

 
Market
Restricted cash and cash equivalents
54,000

 
54,000

 

 

 
Market
Derivative assets
2,073

 

 
2,073

 

 
Market
Total
$
712,320

 
$
710,247

 
$
2,073

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$

 
$

 
$

 
$

 
Income








10



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


 
 
 
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
Derivative assets

 

 

 

 
Market
Total
$
254,041

 
$
254,041

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
1,283

 
$

 
$
1,283

 
$

 
Income
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 the fair value is based on 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 and nine months ended September 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 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.




11



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


In our third quarter 2016 assessment, we reduced economic lives and residuals for all six older Boeing 757-200 aircraft as we intend to sell these aircraft at lease end. As a result, during the three months ended September 30, 2016 , we recorded impairment charges totaling $2,167 relating to two of these aircraft held as operating leases and impairment losses totaling $2,618 relating to three of these aircraft held as finance leases.
During the second quarter of 2016, we completed our annual recoverability assessment of wide-body and freighter aircraft. As a result of this 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.
In our 2015 assessment, we reduced forecasted future cash flows for our six Boeing 747-400 converted freighter aircraft not subject to sales agreements, all of which were more than twenty years old. Our new forecast reflected the persisting glut of supply in the air cargo market resulting from weak growth in demand combined with the growth in capacity arising from new production air freighters and higher belly capacity in latest generation wide-body passenger aircraft. In addition to these market-wide impacts, our older freighters were affected specifically by the imposition of age limits in certain countries and by lower utilization levels.
As a result, we determined that each of our older converted freighter aircraft was on its last lease, and we reduced our residual value assumptions for these aircraft and expected to scrap them following lease expiry. During the third quarter of 2015, we therefore impaired four of these aircraft, which had an aggregate net book value as of August 31, 2015 of $115,888 , writing down their book values by a total of $34,575 , with a fair value date of September 1, 2015. For one of these aircraft, we recorded maintenance revenue of $5,858 , as we no longer planned to reinvest these funds.

Other Impairments
During the three months ended September 30, 2016 , we reduced forecasted cash flows for three Boeing 747-400 freighter aircraft due to a change in planned engine maintenance events. These three aircraft are nearing the end of their economic lives and leases. As a result, we recorded impairment charges totaling $5,450 , maintenance revenue of $5,596 and reversed lease incentives of $2,361 .
Also during the three months ended September 30, 2016 , we impaired one Airbus A321-200 aircraft for which we had a sales agreement, resulting in an impairment charge of $1,712 . This aircraft was classified as Held for sale in Other assets at September 30, 2016 and sold for its recorded value in October 2016.
During the three 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 charge of $5,053 . These two aircraft were classified as Held for sale at June 30, 2016 in Other assets and were subsequently sold in July 2016.
In September 2015, Malaysian Airline System (“MAS”) informed us that it was effectively rejecting the lease on our Boeing 777-200ER aircraft as part of its restructuring. This aircraft, which was manufactured in 1998, was the only one of its type in our fleet and the only aircraft we had on lease to MAS. We repossessed it in October 2015. We reduced the carrying value of this aircraft to our best estimate of scrap value. This write-down resulted in an impairment charge of $37,770 , partially offset by $1,200 of other revenue from a letter of credit we drew following the lease rejection. This aircraft was sold during the second quarter of 2016.
Also in September 2015, we modified the lease agreement with respect to one Airbus A321-200 aircraft. We elected not to reinvest in certain major maintenance events during the lease term, and the lessee agreed to release its rights to certain maintenance payments. As a result, we recorded an impairment charge of $6,058 and maintenance revenue of $7,109 for this aircraft.


12



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

In the second quarter of 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 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 September 30, 2016 and December 31, 2015 are as follows:
 
September 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
315,687

 
333,224

 
404,491

 
422,640

Bank Financings
967,519

 
985,085

 
636,970

 
653,699

Senior Notes
3,200,000

 
3,417,500

 
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 September 30, 2016 were as follows:

Year Ending December 31,
Amount
Remainder of 2016
$
180,010

2017
676,274

2018
613,221

2019
523,645

2020
435,969

Thereafter
1,290,828

Total
$
3,719,947



13



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

Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Region
2016
 
2015
 
2016
 
2015
Asia and Pacific
40
%
 
43
%
 
40
%
 
42
%
Europe
22
%
 
28
%
 
23
%
 
28
%
South America
19
%
 
16
%
 
19
%
 
15
%
Middle East and Africa
12
%
 
9
%
 
12
%
 
9
%
North America
7
%
 
4
%
 
6
%
 
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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
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%
 
2
 
12%
 
4
 
25%
 
3
 
17%
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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Country
Revenue
 
% of
Total
Revenue
 
Revenue
 
% of
Total
Revenue
 
Revenue
 
% of
Total
Revenue
 
Revenue
 
% of
Total
Revenue
Indonesia (1)
$
21,745

 
11%
 
$

 
—%
 
$
61,195

 
11%
 
$

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








14



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 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 and sales-type leases) was as follows:
 
September 30, 2016
 
December 31, 2015
Region
Number
of
Aircraft
 
Net Book
Value %
 
Number
of
Aircraft
 
Net Book
Value %
Asia and Pacific
55

 
39
%
 
49

 
39
%
Europe
57

 
22
%
 
64

 
26
%
South America
23

 
19
%
 
22

 
19
%
Middle East and Africa
14

 
11
%
 
9

 
10
%
North America
24

 
8
%
 
17

 
6
%
Off-lease
2

(1)  
1
%
 
1

(2)  
%
Total
175

 
100
%
 
162

 
100
%
 
_______________
(1)
Consisted of two Boeing 737-800 aircraft delivered to a customer in China in October 2016.
(2)
Consisted of one Boeing 777-200ER aircraft 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 and sales-type 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:
 
September 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
$
721,704

12%
3
 
$
661,178

11%
3
At September 30, 2016 and December 31, 2015 , the amounts of lease incentive liabilities recorded in maintenance payments on our Consolidated Balance Sheets were $15,629 and $21,432 , respectively.
Note 4. Net Investment in Finance and Sales-Type Leases
At September 30, 2016 , our net investment in finance and sales-type leases consisted of fourteen aircraft: eight aircraft leased to two customers in the United States, one aircraft leased to a customer in the Netherlands, three aircraft leased to two customers in Germany, one aircraft leased to a customer in Spain and one aircraft leased to a customer in Sri Lanka. The following table lists the components of our net investment in finance and sales-type leases at September 30, 2016 :
 
 
Amount
Total lease payments to be received
 
$
190,005

Less: Unearned income
 
(84,096
)
Estimated residual values of leased flight equipment (unguaranteed)
 
159,945

Net investment in finance and sales-type leases
 
$
265,854





15



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


At September 30, 2016 , minimum future lease payments on finance and sales-type leases are as follows:
Year Ending December 31,
 
Amount
Remainder of 2016
 
$
8,844

2017
 
34,433

2018
 
27,419

2019
 
27,249

2020
 
26,843

Thereafter
 
65,217

Total lease payments to be received
 
$
190,005

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 transactions under our related party policy.
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”). IBJ Air is targeted at new narrow-body aircraft leased to premier airlines providing Aircastle with increased access to this market sector and to these customers. During the nine months ended September 30, 2016, we sold two Airbus A320 family aircraft for approximately $ 50,000 to IBJ Air, in which we hold a 25% equity interest.
None of these joint ventures qualifies for consolidated accounting treatment. The assets and liabilities of Lancaster and IBJ Air are not included in our Consolidated Balance Sheets and we record our net investment under the equity method of accounting. 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 September 30, 2016 , the net book value of our two joint ventures’ eleven aircraft was approximately $ 629,000 .
 
 
Amount
Investment in joint ventures at December 31, 2015
 
$
50,377

Investment in joint ventures
 
13,422

Earnings from joint ventures, net of tax
 
5,390

Distributions
 
(2,029
)
Investment in joint ventures at September 30, 2016
 
$
67,160






16



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 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 September 30, 2016 of $521,007 , 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 September 30, 2016 is $306,103 .














17



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


Note 7. Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured term debt financings are as follows:
 
At September 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)
315,687

 
7

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

Bank Financings (3)(4)
967,519

 
29

 
1.52% to 5.09%
 
10/26/17 to 01/19/26
 
636,970

Less: Debt Issuance Costs
(21,783
)
 

 
 
 
 
 
(20,589
)
Total secured debt financings, net of debt issuance costs
1,261,423

 
36

 
 
 
 
 
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
(33,696
)
 
 
 
 
 
 
 
(30,082
)
Total unsecured debt financings, net of debt issuance costs
3,286,304

 
 
 
 
 
 
 
2,894,918

 
 
 
 
 
 
 
 
 
 
Total secured and unsecured debt financings, net of debt issuance costs
$
4,547,727

 
 
 
 
 
 
 
$
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 September 30, 2016 have a weighted-average rate of interest of 3.53% .
(3)
The borrowings under these financings at September 30, 2016 have a weighted-average fixed rate of interest of 3.22% .
(4)
In September 2016, we purchased an interest rate cap for $2,283 to hedge approximately 70% of our floating rate interest exposure. The interest rate cap is set at 2% and has a starting notional balance of $430,000 and reduces over time to $215,000 . The cap matures in September 2021.
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.


18



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


Bank Financings
In June 2016, we entered into a seven -year, full recourse $434,250 floating rate financing with BNP Paribas, Credit Agricole Corporate and Investment Bank and certain other banks for eighteen aircraft. As of September 30, 2016 , we funded sixteen aircraft with an outstanding balance of $372,784 under this facility.  Funding for the final two aircraft was in October 2016 for $54,900 .

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 September 30, 2016 , we had no amounts outstanding under this facility.
As of September 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 nine months ended September 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 ends on 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 nine months ended September 30, 2016, including the number of common shares underlying the awards at the time of grant:

19



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

 
Minimum
 
Target
 
Maximum
TSR PSUs

 
143,414

 
286,828

AROE PSUs

 
143,409

 
286,818

Total

 
286,823

 
573,646

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 95,607 . 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 nine months ended September 30, 2016 , the Company granted a target of 191,216 PSUs of which 143,414 are TSR PSUs and 47,802 are AROE PSUs. The remaining 95,607 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 nine months ended September 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
Weighted Fair
Value Equal to
Adjusted Closing
Stock Price on Date
of Grant ($)
Unvested at December 31, 2015

 

 
$

 
$

     Granted
143,414

 
47,802

 
25.07

 
19.18

Unvested as of September 30, 2016
143,414

 
47,802

 
$
25.07

 
$
19.18

Expected to vest after September 30, 2016
143,414

 
47,802

 
$
25.07

 
$
19.18



The Company incurred share-based compensation expense related to PSUs of $852 for the nine months ended September 30, 2016 . As of September 30, 2016 , there was $3,660 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 2.3 years .
During the first nine months of 2016, we acquired 1,827,352 common shares at an aggregate cost of $34,423 , including commissions, under the repurchase program approved by the Company’s Board of Directors on February 9, 2016. As of September 30, 2016 , the dollar value of common shares remaining under this program is $96,656 . We also repurchased 102,927 shares totaling $2,150 from our employees and directors to settle tax obligations related to share vesting.




20



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 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
August 2, 2016
$
0.24

 
$
18,872

 
August 26, 2016
 
September 15, 2016
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
Note 10. Earnings (Loss) 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 (loss) per share calculations using the two-class method. All of our restricted common shares are currently participating securities.
Under the two-class method, earnings (loss) 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 ended September 30, 2015.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Weighted-average shares:
 
 
 
 
 
 
 
Common shares outstanding
77,989,933

 
80,566,400

 
78,230,011

 
80,565,754

Restricted common shares
680,249

 
645,427

 
646,299

 
604,179

Total weighted-average shares
78,670,182

 
81,211,827

 
78,876,310

 
81,169,933

 
 
 
 
 
 
 
 
Percentage of weighted-average shares:
 
 
 
 
 
 
 
Common shares outstanding
99.14
%
 
99.21
%
 
99.18
%
 
99.26
%
Restricted common shares
0.86
%
 
0.79
%
 
0.82
%
 
0.74
%
Total percentage of weighted-average shares
100.00
%
 
100.00
%
 
100.00
%
 
100.00
%






21



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


The calculations of both basic and diluted earnings (loss) per share are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Earnings (loss) per share – Basic:
 
 
 
 
 
 
 
Net income (loss)
$
27,437

 
$
(13,989
)
 
$
83,729

 
$
71,088

Less: Distributed and undistributed earnings allocated to restricted common shares (1)
(237
)
 

 
(686
)
 
(529
)
Earnings (loss) available to common shareholders – Basic
$
27,200

 
$
(13,989
)
 
$
83,043

 
$
70,559

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
77,989,933

 
80,566,400

 
78,230,011

 
80,565,754

 
 
 
 
 
 
 
 
Earnings (loss) per common share – Basic
$
0.35

 
$
(0.17
)
 
$
1.06

 
$
0.88

 
 
 
 
 
 
 
 
Earnings (loss) per share – Diluted:
 
 
 
 
 
 
 
Net income (loss)
$
27,437

 
$
(13,989
)
 
$
83,729

 
$
71,088

Less: Distributed and undistributed earnings allocated to restricted common shares (1)
(237
)
 

 
(686
)
 
(529
)
Earnings (loss) available to common shareholders – Diluted
$
27,200

 
$
(13,989
)
 
$
83,043

 
$
70,559

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
77,989,933

 
80,566,400

 
78,230,011

  
80,565,754

Effect of dilutive shares (2)
32,235

 

 
35,804

 

Weighted-average common shares outstanding – Diluted
78,022,168

 
80,566,400

 
78,265,815

  
80,565,754

 
 
 
 
 
 
 
 
Earnings (loss) per common share – Diluted
$
0.35

 
$
(0.17
)
 
$
1.06

  
$
0.88

 
        
(1)
For the three months ended September 30, 2016 , distributed and undistributed earnings to restricted shares are 0.86% , of net income. For the nine months ended September 30, 2016 and 2015 , distributed and undistributed earnings to restricted shares are 0.82% and 0.74% 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 nine months ended September 30, 2016 , dilutive shares represented contingently issuable shares related to the Company’s PSUs. For the three and nine months ended September 30, 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 (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investment for the three and nine months ended September 30, 2016 and 2015 were as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
U.S. operations
$
(92
)
 
$
597

 
$
1,652

 
$
1,817

Non-U.S. operations
28,182

 
(13,434
)
 
85,469

 
76,745

Total
$
28,090

 
$
(12,837
)
 
$
87,121

 
$
78,562




22



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
September 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 nine months ended September 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 nine months ended September 30, 2016 was 8.8% and 10.1% , respectively, compared to (21.1)% and 15.3% for the three and nine months ended September 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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Notional U.S. federal income tax expense (benefit) at the statutory rate
$
9,831

 
$
(4,493
)
 
$
30,492

 
$
27,497

U.S. state and local income tax, net
14

 
57

 
139

 
167

Non-U.S. operations:
 
 
 
 
 
 
 
Bermuda
(6,025
)
 
6,696

 
(16,687
)
 
(9,199
)
Ireland
82

 
2,500

 
2,155

 
(407
)
Singapore
(823
)
 
(1,385
)
 
(4,874
)
 
(4,116
)
Other
(752
)
 
(860
)
 
(2,835
)
 
(2,439
)
Non-deductible expenses in the U.S.
133

 
205

 
418

 
566

Other
(2
)
 
(11
)
 
(26
)
 
(32
)
Income tax provision
$
2,458

 
$
2,709

 
$
8,782

 
$
12,037











23



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


Note 12. Interest, Net
The following table shows the components of interest, net: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities (1)
$
57,589

 
$
51,428

 
$
166,692

 
$
153,076

Hedge ineffectiveness losses

 
215

 

 
509

Amortization of interest rate derivatives related to deferred losses
705

 
5,006

 
9,074

 
19,349

Amortization of deferred financing fees and debt discount (2)
4,097

 
3,746

 
13,567

 
11,211

Interest expense
62,391

 
60,395

 
189,333

 
184,145

Less interest income
(546
)
 
(14
)
 
(768
)
 
(82
)
Less capitalized interest
(48
)
 

 
(75
)
 

Interest, net
$
61,797

 
$
60,381

 
$
188,490

 
$
184,063

        
(1)
For the three and nine months ended September 30, 2016 , includes $0 and $1,509 , respectively, in loan termination fees related to the sale of one aircraft.
(2)
For the three and nine months ended September 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 September 30, 2016 , we had commitments to acquire 36 aircraft for $1,322,989 , including 25 Embraer E-2 aircraft.
Commitments, including $140,717 of progress payments, contractual price escalations and other adjustments for these aircraft, at September 30, 2016 , net of amounts already paid, are as follows:
Year Ending December 31,
 
Amount
Remainder of 2016
 
$
241,761

2017
 
170,253

2018
 
258,179

2019
 
293,756

2020
 
216,847

Thereafter
 
142,193

Total
 
$
1,322,989

Note 14. Other Assets
The following table describes the principal components of other assets on our Consolidated Balance Sheets as of:
 
September 30,
2016
 
December 31,
2015
Deferred federal income tax asset
$
1,590

 
$
1,362

Lease incentives and lease premiums, net of amortization of $36,652 and $31,623, respectively
78,334

 
86,874

Flight equipment held for sale (1)
17,701

 
12,901

Other assets
32,215

 
22,570

Total other assets
$
129,840

 
$
123,707

 
        
(1)
In October 2016, we sold one Airbus A321-200 aircraft.

24



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


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:
 
September 30,
2016
 
December 31,
2015
Accounts payable and accrued expenses
$
23,722

 
$
34,457

Deferred federal income tax liability
38,627

 
35,269

Accrued interest payable
64,105

 
37,606

Lease discounts, net of amortization of $26,544 and $19,403, respectively
17,686

 
22,443

Fair value of derivative liabilities

 
1,283

Total accounts payable, accrued expenses and other liabilities
$
144,140

 
$
131,058


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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
(4,845
)
 
$
(23,681
)
 
$
(13,213
)
 
$
(38,460
)
Amounts recognized in other comprehensive loss on derivatives, net of tax expense of $0 and $10 for the three months ended and tax expense of $0 and $10 for the nine months ended September 30, 2016 and 2015, respectively

 
(545
)
 
(690
)
 
(1,940
)
Amounts reclassified from accumulated other comprehensive loss into income, net of tax expense of $0 and benefit of $7 for the three months ended and tax expense of $0 and $16 for the nine months ended September 30, 2016 and 2015, respectively
705

 
5,823

 
9,763

 
21,997

   Net current period other comprehensive income
705

 
5,278

 
9,073

 
20,057

Ending balance
$
(4,140
)
 
$
(18,403
)
 
$
(4,140
)
 
$
(18,403
)
        
(1) All amounts are net of tax. Amounts in parentheses indicate debits.
Reclassifications from accumulated other comprehensive loss (1)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Amount of effective amortization of net deferred interest rate derivative losses (2)
$
705

 
$
5,006

 
$
9,074

 
$
19,349

Effective amount of net settlements of interest rate derivatives, net of tax expense of $0 and benefit of $7 for the three months ended and tax expense of $0 and $16 for the nine months ended September 30, 2016 and 2015, respectively

 
817

 
689

 
2,648

Amount of loss reclassified from accumulated other comprehensive loss into income
$
705

 
$
5,823

 
$
9,763

 
$
21,997

        
(1) All amounts are net of tax.
(2) Included in interest expense.
At September 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 $2,312 .

25


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.

26


OVERVIEW
Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. As of September 30, 2016 , we owned and managed on behalf of our joint ventures 186 aircraft leased to 65 lessees located in 35 countries. Eleven 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 September 30, 2016 , the net book value of our flight equipment and finance lease aircraft was $6.27 billion compared to $6.07 billion at December 31, 2015. Our revenues and net income for the three and nine months ended September 30, 2016 were $194.7 million  and $27.4 million , and $568.3 million and $83.7 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 twenty 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 eight months of 2016, global passenger traffic increased 5.8% 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 eight months of 2016, air cargo traffic increased 1.4% compared to the same period in 2015, but capacity increased 5.6% , 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, Brazil, and now Turkey, are under pressure, 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.
Low fuel prices and record low interest rates are having substantial effects on our industry. With jet fuel at less than half its cost compared to three years ago, airlines have been able to reduce ticket prices and stimulate aircraft traffic while retaining enough of this benefit to achieve record profit levels. We believe the prospect of fuel prices remaining low for some time is shifting lease pricing among different types of aircraft, generally to the detriment of newer, more fuel efficient aircraft with higher capital costs. At the same time, low interest rates and strong overall industry performance is drawing significant capital to our business and increasing competition for new investments.
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

27


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 and growth rates vary with market conditions. We prefer to have capital resources available to capture investment opportunities that arise in the 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 80 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 set 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.

28


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 August 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 September 30, 2016 , which was paid on September 15, 2016 to holders of record on August 26, 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.
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 September 30, 2016 , we had two aircraft scheduled to come off lease during 2016 for which we have not yet secured a lease or sales commitments. We have since secured a lease commitment for one of these aircraft and a sale commitment for the other.

29


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 and sales-type leases) at September 30, 2016 , specified below:
2017: 16 aircraft, representing 8%;
2018: 15 aircraft, representing 11%;
2019: 17 aircraft, representing 11%; and