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~~June 30, ~~2017~~2019



¨☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File number 001-32959

AIRCASTLE LIMITED

(Exact name of registrant as specified in its charter)



Bermuda	98-0444035
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

c/o Aircastle Advisor LLC
201 Tresser Boulevard, Suite 400
Stamford CT
Connecticut
06901
(Address of ~~principal executive offices)~~		~~(Zip Code)~~Principal Executive Offices)

Registrant’s telephone number, including area ~~code (203)~~ 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	AYR	New York Stock Exchange

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 ¨Yes ☑ 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 ¨Yes ☑ No ☐

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



Large accelerated filer	þ☑	Accelerated filer	¨☐
Non-accelerated filer	o ~~(Do not check if a smaller reporting company)~~ ☐	Smaller reporting company	¨☐
		Emerging growth company	¨☐

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

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

As of ~~October 31, 2017~~August 2, 2019, there were ~~78,707,968~~74,950,797 outstanding shares of the registrant’s common shares, par value $0.01 per share.

Aircastle Limited and Subsidiaries

Form 10-Q

Table of Contents



		Page No.
	PART I. – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018	3
	Consolidated Statements of Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	4
	Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	5
	Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	6
	Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2019 and 2018	8
	Notes to Unaudited Consolidated Financial Statements	89
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2324
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4546
Item 4.	Controls and Procedures	4547
	PART II. – OTHER INFORMATION
Item 1.	Legal Proceedings	4748
Item 1A.	Risk Factors	4748
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4748
Item 3.	Defaults Upon Senior Securities	4748
Item 4.	Mine Safety Disclosures	4748
Item 5.	Other Information	4749
Item 6.	Exhibits	48
~~SIGNATURE~~		50
SIGNATURE		52

PART I. — FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

Aircastle Limited and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)


	September 30, 2017			December 31, 2016			June 30, 2019		December 31, 2018
	(Unaudited)						(Unaudited)
ASSETS
Cash and cash equivalents	$	662,649		$	455,579		$	500,373	$	152,719
Restricted cash and cash equivalents	20,536			53,238			14,751		15,134
Accounts receivable	5,708			6,035			12,841		15,091
Flight equipment held for lease, net of accumulated depreciation of $1,168,064 and $1,224,899, respectively	5,490,164			6,247,585
Net investment in finance and sales-type leases	488,408			260,853
Flight equipment held for lease, net of accumulated depreciation of $1,371,515 and $1,221,985, respectively							7,341,097		6,935,585
Net investment in direct financing and sales-type leases							500,918		469,180
Unconsolidated equity method investments	76,098			72,977			78,793		69,111
Other assets	131,395			148,398			185,702		214,361
Total assets	$	6,874,958		$	7,244,665		$	8,634,475	$	7,871,181

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Borrowings from secured financings, net of debt issuance costs	$	874,874		$	1,219,034
Borrowings from unsecured financings, net of debt issuance costs	3,286,240			3,287,211
Borrowings from secured financings, net of debt issuance costs and discounts							$	1,214,402	$	798,457
Borrowings from unsecured financings, net of debt issuance costs and discounts							4,277,731		3,962,896
Accounts payable, accrued expenses and other liabilities	145,691			127,527			164,585		153,341
Lease rentals received in advance	51,937			62,225			96,973		87,772
Security deposits	120,320			122,597			124,867		120,962
Maintenance payments	523,922			591,757			734,433		739,072
Total liabilities	5,002,984			5,410,351			6,612,991		5,862,500

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, 78,707,968 shares issued and outstanding at September 30, 2017; and 78,593,133 shares issued and outstanding at December 31, 2016	787			786
Common shares, $0.01 par value, 250,000,000 shares authorized, 74,983,114 shares issued and outstanding at June 30, 2019; and 75,454,511 shares issued and outstanding at December 31, 2018							750		754
Additional paid-in capital	1,525,766			1,521,190			1,460,534		1,468,779
Retained earnings	347,248			315,890			560,200		539,332
Accumulated other comprehensive loss	(1,827		)	(3,552		)	—		(184		)
Total shareholders’ equity	1,871,974			1,834,314			2,021,484		2,008,681

Total liabilities and shareholders’ equity	$	6,874,958		$	7,244,665		$	8,634,475	$	7,871,181

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Income

(Dollars in thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Revenues:
Lease rental revenue	$	171,687		$	181,975		$	551,371		$	537,670		$	192,823		$	178,486		$	374,057		$	355,969
Finance and sales-type lease revenue	6,412			5,354			16,363			13,026
Direct financing and sales-type lease revenue													8,321			8,868			16,764			18,310
Amortization of lease premiums, discounts and incentives	(2,388		)	(521		)	(8,780		)	(5,419		)	(5,345		)	(3,534		)	(11,056		)	(6,662		)
Maintenance revenue	14,507			6,829			55,738			20,603			26,567			—			42,968			11,991
Total lease revenue	190,218			193,637			614,692			565,880			222,366			183,820			422,733			379,608
Gain on sale of flight equipment													346			19,864			12,348			25,632
Other revenue	1,193			1,015			4,526			2,425			704			592			2,262			1,716
Total revenues	191,411			194,652			619,218			568,305			223,416			204,276			437,343			406,956

Operating expenses:
Depreciation	70,018			76,201			227,446			227,918			89,578			76,181			174,313			151,183
Interest, net	60,636			61,797			185,376			188,490			66,377			57,398			129,840			114,506
Selling, general and administrative (including non-cash share-based payment expense of $2,506 and $2,059 for the three months ended, and $10,636 and $5,796 for the nine months ended September 30, 2017 and 2016, respectively)	17,137			15,985			55,491			46,883
Selling, general and administrative (including non-cash share-based payment expense of $3,177 and $3,076 for the three months ended and $5,903 and $5,454 for the six months ended June 30, 2019 and 2018, respectively)													18,317			18,583			36,317			36,418
Impairment of flight equipment	—			10,462			80,430			27,185			7,404			—			7,404			—
Maintenance and other costs	2,572			1,834			7,846			5,504			5,213			1,561			12,617			2,549
Total expenses	150,363			166,279			556,589			495,980
Total operating expenses													186,889			153,723			360,491			304,656

Other income (expense):
Gain (loss) on sale of flight equipment	21,642			(73		)	35,926			14,932
Other	(360		)	(210		)	(3,069		)	(136		)
Total other income (expense)	21,282			(283		)	32,857			14,796			(1,910		)	901			(3,971		)	4,075

Income from continuing operations before income taxes and earnings of unconsolidated equity method investments	62,330			28,090			95,486			87,121			34,617			51,454			72,881			106,375
Income tax provision	6,195			2,458			8,536			8,782			5,992			3,132			9,090			2,288
Earnings of unconsolidated equity method investments, net of tax	1,296			1,805			5,804			5,390			2,487			1,881			2,131			3,663
Net income	$	57,431		$	27,437		$	92,754		$	83,729		$	31,112		$	50,203		$	65,922		$	107,750

Earnings per common share — Basic:
Net income per share	$	0.73		$	0.35		$	1.18		$	1.06		$	0.41		$	0.64		$	0.88		$	1.37

Earnings per common share — Diluted:
Net income per share	$	0.73		$	0.35		$	1.18		$	1.06		$	0.41		$	0.64		$	0.87		$	1.37

Dividends declared per share	$	0.26		$	0.24		$	0.78		$	0.72		$	0.30		$	0.28		$	0.60		$	0.56

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016			2019		2018		2019		2018

Net income	$	57,431	$	27,437	$	92,754	$	83,729		$	31,112	$	50,203	$	65,922	$	107,750
Other comprehensive income, net of tax:
Net change in fair value of derivatives, net of tax expense of $0 for all periods presented	—		—		—		(1		)
Net derivative loss reclassified into earnings	569		705		1,725		9,074			—		294		184		595
Other comprehensive income	569		705		1,725		9,073			—		294		184		595
Total comprehensive income	$	58,000	$	28,142	$	94,479	$	92,802		$	31,112	$	50,497	$	66,106	$	108,345

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)


	Nine Months Ended September 30,						Six Months Ended June 30,
	2017			2016			2019			2018
Cash flows from operating activities:
Net income	$	92,754		$	83,729		$	65,922		$	107,750
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash and restricted cash provided by operating activities:
Depreciation	227,446			227,918			174,313			151,183
Amortization of deferred financing costs	15,860			13,567			6,958			7,042
Amortization of lease premiums, discounts and incentives	8,780			5,419			11,056			6,662
Deferred income taxes	(1,369		)	3,129			7,957			3,126
Non-cash share-based payment expense	10,636			5,796			5,903			5,454
Cash flow hedges reclassified into earnings	1,725			9,074			184			595
Collections on direct financing and sales-type leases							10,971			13,127
Security deposits and maintenance payments included in earnings	(17,147		)	(12,844		)	(24,162		)	(554		)
Gain on sale of flight equipment	(35,926		)	(14,932		)	(12,348		)	(25,632		)
Impairment of flight equipment	80,430			27,185			7,404			—
Other	2,078			(4,712		)	209			(7,491		)
Changes in certain assets and liabilities:
Accounts receivable	415			1,699			(7,899		)	(7,315		)
Other assets	(6,980		)	3,815			3,582			(3,086		)
Accounts payable, accrued expenses and other liabilities	17,648			16,459			(11,619		)	(14,799		)
Lease rentals received in advance	(2,892		)	2,111			7,181			16,908
Net cash and restricted cash provided by operating activities	393,458			367,413			245,612			252,970
Cash flows from investing activities:
Acquisition and improvement of flight equipment	(353,492		)	(792,270		)	(660,723		)	(365,505		)
Proceeds from sale of flight equipment	764,984			488,749			56,924			178,185
Net investment in finance and sales-type leases	(246,871		)	(78,892		)
Collections on finance and sales-type leases	23,673			14,413
Net investment in direct financing and sales-type leases							—			(16,256		)
Aircraft purchase deposits and progress payments, net of returned deposits and aircraft sales deposits	(14,068		)	(14,035		)	18,054			(3,965		)
Unconsolidated equity method investments and associated costs	—			(12,686		)	(7,551		)	—
Other	(405		)	(812		)	2,241			2,956
Net cash and restricted cash provided by (used in) investing activities	173,821			(395,533		)
Net cash and restricted cash used in investing activities							(591,055		)	(204,585		)
Cash flows from financing activities:
Repurchase of shares	(4,862		)	(36,573		)	(14,288		)	(14,987		)
Proceeds from secured and unsecured debt financings	500,000			999,350			1,841,848			—
Repayments of secured and unsecured debt financings	(852,451		)	(489,134		)	(1,105,353		)	(128,342		)
Deferred financing costs	(8,540		)	(17,273		)	(12,165		)	(1,615		)
Restricted secured liquidity facility collateral	—			65,000
Liquidity facility	—			(65,000		)
Security deposits and maintenance payments received	138,813			123,767			92,514			108,653
Security deposits and maintenance payments returned	(104,475		)	(37,036		)	(64,788		)	(38,718		)
Dividends paid	(61,396		)	(56,702		)	(45,054		)	(43,993		)
Other	—			(2,073		)
Net cash and restricted cash (used in) provided by financing activities	(392,911		)	484,326
Net increase in cash and restricted cash	174,368			456,206
Net cash and restricted cash provided by (used in) financing activities							692,714			(119,002		)
Net decrease in cash and restricted cash:							347,271			(70,617		)
Cash and restricted cash at beginning of period	508,817			254,041			167,853			233,857

Cash and restricted cash at end of period	$	683,185		$	710,247		$	515,124		$	163,240

Aircastle Limited and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(Dollars in thousands)

(Unaudited)


	Nine Months Ended September 30,				Six Months Ended June 30,
					2019		2018
Reconciliation to Consolidated Balance Sheets:
Cash and cash equivalents					$	500,373	$	142,360
Restricted cash and cash equivalents					14,751		20,880

Unrestricted and restricted cash and cash equivalents					$	515,124	$	163,240
	2017		2016
Supplemental disclosures of cash flow information:
Cash paid for interest, net of capitalized interest	$	156,428	$	141,653	$	121,523	$	108,078
Cash paid for income taxes	$	3,622	$	12,904	$	115	$	5,533
Supplemental disclosures of non-cash investing activities:
Advance lease rentals, security deposits and maintenance payments assumed in asset acquisitions	$	133,389	$	110,472
Advance lease rentals, security deposits, and maintenance payments settled in sale of flight equipment	$	22,542	$	26,671
Transfers from Flight equipment held for lease to Net investment in finance and sales-type leases, Other assets, and Maintenance reserves	$	154,213	$	140,150
Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets assumed in asset acquisitions					$	35,889	$	28,348
Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets settled in sale of flight equipment					$	10,938	$	40,116
Transfers from flight equipment held for lease to Net investment in direct financing and sales-type leases and Other assets					$	59,185	$	40,198

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except share amounts)

(Unaudited)



						Additional Paid-In Capital			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Common Shares
	Shares		Amount
Balance, December 31, 2018	75,454,511		$	754		$	1,468,779		$	539,332		$	(184	)	$	2,008,681
Issuance of common shares to directors and employees	276,923		3			(3		)	—			—			—
Repurchase of common shares from stockholders, directors and employees	(653,796	)	(6		)	(11,418		)	—			—			(11,424		)
Amortization of share-based payments	—		—			2,410			—			—			2,410
Reclassification of prior year director stock award liability	—		—			796			—			—			796
Dividends declared	—		—			—			(22,518		)	—			(22,518		)
Net income	—		—			—			34,810			—			34,810
Net derivative loss reclassified into earnings	—		—			—			—			184			184
Balance, March 31, 2019	75,077,638		$	751		$	1,460,564		$	551,624		$	—		$	2,012,939
Issuance of common shares to directors and employees	35,000		—			—			—			—			—
Repurchase of common shares from stockholders, directors and employees	(129,524	)	(1		)	(2,863		)	—			—			(2,864		)
Amortization of share-based payments	—		—			2,833			—			—			2,833
Dividends declared	—		—			—			(22,536		)	—			(22,536		)
Net income	—		—			—			31,112			—			31,112
Balance, June 30, 2019	74,983,114		$	750		$	1,460,534		$	560,200		$	—		$	2,021,484


						Additional Paid-In Capital			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Common Shares
	Shares		Amount
Balance, December 31, 2017	78,707,963		$	787		$	1,527,796		$	380,331		$	(1,350	)	$	1,907,564
Issuance of common shares to stockholders, directors and employees	293,680		3			(3		)	—			—			—
Repurchase of common shares from stockholders, directors and employees	(462,452	)	(5		)	(9,408		)	—			—			(9,413		)
Amortization of share-based payments	—		—			2,048			—			—			2,048
Reclassification of prior year director stock award liability	—		—			1,680			—			—			1,680
Dividends declared	—		—			—			(22,085		)	—			(22,085		)
Net income	—		—			—			57,547			—			57,547
Adoption of accounting standard	—		—			—			(188		)	—			(188		)
Net derivative loss reclassified into earnings	—		—			—			—			301			301
Balance, March 31, 2018	78,539,191		$	785		$	1,522,113		$	415,605		$	(1,049	)	$	1,937,454
Repurchase of common shares from stockholders, directors and employees	(295,153	)	(3		)	(5,571		)	—			—			(5,574		)
Amortization of share-based payments	—		—			2,750			—			—			2,750
Reclassification of prior year director stock award liability	—		—			187			—			—			187
Dividends declared	—		—			—			(21,908		)	—			(21,908		)
Net income	—		—			—			50,203			—			50,203
Net derivative loss reclassified into earnings	—		—			—			—			294			294
Balance, June 30, 2018	78,244,038		$	782		$	1,519,479		$	443,900		$	(755	)	$	1,963,406

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

~~September~~June 30, ~~2017~~2019

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~~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, ~~2016~~2018.

Effective January 1, ~~2017,~~2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards ~~Update~~Codification (“~~ASU”~~ASC”) ~~No. 2016-18,~~ ~~Statement~~842, Leases (“ASC 842”) which, together with all subsequent amendments, replaced the existing guidance in ASC 840, Leases (“ASC 840”). The accounting for leases by lessors remained largely unchanged from the concepts that existed in ASC 840. The FASB decided that lessors would be precluded from recognizing selling profit and revenue at lease commencement for any sales-type or direct financing lease that does not transfer control of ~~Cash Flows (Topic 230), Restricted Cash. For~~ the ~~nine months ended September 30, 2017,~~underlying asset to the ~~Company revised~~lessee. This requirement aligns the ~~presentation~~notion of what constitutes a sale in the lessor accounting guidance with that in the revenue recognition standard, which evaluates whether a sale has occurred from the customer’s perspective.

As a result of the Company’s adoption of ASC 842, we have recognized right-of-use assets and lease liabilities on our Consolidated ~~Statements~~Balance Sheet as of ~~Cash Flows to show~~June 30, 2019, for our office leases classified as operating leases under ASC 842, existing at, or entered into after, January 1, 2019. We adopted the ~~changes in~~standard using the ~~total~~required “modified retrospective” approach and the available practical expedients. The standard did not have a material impact on our consolidated financial statements and related disclosures.

As part of ~~cash, cash equivalents, restricted cash~~the Company’s adoption of ASC 842, we classified collections on direct financing and ~~restricted cash equivalents. For the nine months ended September 30, 2016,~~sales-type leases within operating activities on our Consolidated Statement of Cash Flows ~~reflected: (1) changes in restricted cash related to~~for the ~~sale of flight equipment~~six months ended June 30, 2019. This had previously been included within investing ~~activities; and (2) changes in restricted cash and restricted cash equivalents related to rents, maintenance payments and security deposits within financing~~ activities. ~~Therefore, the amounts included~~The presentation for the ~~nine~~six months ended ~~September~~June 30, ~~2016 have~~2018, has also been reclassified to conform to the current period ~~presentation.~~presentation:



	Six Months Ended June 30, 2018
Net cash and restricted cash provided by operating activities as previously reported	$	239,843
Collections on direct financing and sales-type leases	13,127
Net cash and restricted cash provided by operating activities	$	252,970

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~~June 30, ~~2017~~2019, through the date on which the consolidated financial statements included in this Form 10-Q were issued.

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

June 30, 2019

Principles of Consolidation

The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates four Variable Interest Entities (“VIEs”) of which Aircastle is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.

We consolidate VIEs in which we have determined that we are the primary beneficiary. We use judgment when deciding: (a) whether an entity is subject to consolidation as a VIE; (b) who the variable interest holders are; (c) the potential expected losses and residual returns of the variable interest holders; and (d) which variable interest holder is the primary beneficiary. When determining which enterprise is the primary beneficiary, we consider: (1) the entity’s purpose and design; (2) which variable interest holder has the power to direct the activities that most significantly impact the entity’s economic performance; and (3) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. When certain events occur, we reconsider whether we are the primary beneficiary of VIEs. We do not reconsider whether we are a primary beneficiary solely because of operating losses incurred by an entity.

~~Aircastle Limited and Subsidiaries~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollars in thousands, except per share amounts)~~

~~September 30, 2017~~

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.

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 statement of income in the period of change.

Flight Equipment Held for Lease and Depreciation

Estimated residual values are generally determined to be approximately 15% of the manufacturer’s estimated realized price for passenger aircraft when new and 5% to 10% for freighter aircraft when new. Management may make exceptions to this policy on a case-by-case basis when, in its judgment, the residual value calculated pursuant to this policy does not appear to reflect current expectations of value or when events or changes in circumstances, or indicators, suggest that the carrying amount or net book value of an asset may not be recoverable.

Recent Accounting Pronouncements

~~On February 25,~~In June 2016, the FASB issued Accounting Standards ~~Codification~~Update (“~~ASC”~~ASU”) ~~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 approach. 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.

~~In June 2016, the FASB issued ASU~~ No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. and related updates. The standard affects entities holding financial assets and net ~~investment~~investments in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The standard replaces today’s incurred loss model with an expected loss model that requires entities to consider a broader range of information to estimate expected credit losses over the lifetime of the asset. Under the new standard, an allowance for credit losses is recorded which represents amounts not expected to be collected. The standard is applied on a modified retrospective approach. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as early as the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Upon the Company’s adoption of the standard, the primary impact will be to the carrying value of our net investment in direct financing and sales-type leases, as we will recognize an

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

June 30, 2019

allowance for credit losses in 2020 with an adjustment to the opening balance of retained earnings. We continue to evaluate the impact the standard will have on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued 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 standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of determining the impact the standard will have on our related disclosures.

In August 2018, the FASB issued 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 standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. We are in the process of determining the impact the standard will have on our consolidated financial statements and related disclosures.

In ~~August 2016,~~October 2018, the FASB issued ASU No. ~~2016-15,~~ ~~Statement of Cash Flows~~2018-17, Consolidation (Topic ~~230)~~810), ~~Classification of Certain Cash Receipts and Cash Payments~~Targeted Improvements to Related Party Guidance for Variable Interest Entities. The standard ~~clarifies~~changes how all entities ~~should classify certain cash receipts and cash payments on~~evaluate decision-making fees under the ~~statement~~variable interest entity guidance. The standard is applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of ~~cash flows. The guidance also clarifies how~~ the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The update should be applied using a retrospective transition method to eachearliest period presented. The standard is effective for annual periods beginning after December 15, ~~2017,~~2019, including interim periods within those fiscal years. Early adoption is permitted. ~~The~~We are in the process of determining the impact the standard will ~~not~~ have ~~a material impact~~ on our consolidated financial statements and related disclosures.

~~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) and related updates. 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, using the modified retrospective approach. We do not expect the impact of this standard to be material to our consolidated financial statements and related disclosures.

~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting~~. The standard clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting

~~Aircastle Limited and Subsidiaries~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollars in thousands, except per share amounts)~~

~~September 30, 2017~~

conditions or classification of the award changes. In addition, when applicable, disclosure is required to indicate that compensation expense has not changed. The update should be applied using a prospective transition method to each period presented. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard will not have a material impact on our consolidated financial statements and related disclosures.

Note 2. Fair Value Measurements

Fair value measurements and disclosures require the use of valuation techniques to measure fair value that maximize the use of observable inputs and minimize use of unobservable inputs. These inputs are prioritized as follows:

Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.

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 ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 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 September 30, 2017
Using Fair Value Hierarchy
Fair Value as of September 30, 2017
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 $ 662,649
$ 662,649
$ —
$ —
Market
Restricted cash and cash equivalents 20,536
20,536
—
—
Market
Derivative assets 2,663
—
2,663
—
Market
Total $ 685,848
$ 683,185
$ 2,663
$ —

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

~~September~~June 30, ~~2017~~2019


			Fair Value Measurements at December 31, 2016 Using Fair Value Hierarchy									Fair Value Measurements at June 30, 2019 Using Fair Value Hierarchy
	Fair Value as of December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation Technique	Fair Value as of June 30, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation Technique
Assets:
Cash and cash equivalents	$	455,579	$	455,579	$	—	$	—	Market	$	500,373	$	500,373	$	—	$	—	Market
Restricted cash and cash equivalents	53,238		53,238		—		—		Market	14,751		14,751		—		—		Market
Derivative assets	5,735		—		5,735		—		Market	891		—		891		—		Market
Total	$	514,552	$	508,817	$	5,735	$	—		$	516,015	$	515,124	$	891	$	—



			Fair Value Measurements at December 31, 2018 Using Fair Value Hierarchy
	Fair Value as of December 31, 2018		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	$	152,719	$	152,719	$	—	$	—	Market
Restricted cash and cash equivalents	15,134		15,134		—		—		Market
Derivative assets	4,886		—		4,886		—		Market
Total	$	172,739	$	167,853	$	4,886	$	—

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 assets included in Level 2 ~~consists~~consist of United States dollar-denominated interest rate ~~cap,~~caps, 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~~six months ended ~~September~~June 30, ~~2017~~2019 and the year ended December 31, ~~2016,~~2018, 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 investments in unconsolidated joint ventures and aircraft. We account for our investments in unconsolidated joint ventures under the equity method of accounting and record impairment when its fair value is less than its carrying ~~value.~~value and the Company determines that the decline is other than temporary. 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

Transactional Impairments

~~During~~On April 10, 2019, the Company early terminated the leases for seven Boeing 737NG aircraft on lease to Jet Airways (India) Limited (“Jet Airways”) due to lessee default. As a result of these lease terminations, the Company recognized net maintenance revenue of $17,554 and impairment charges of $7,404 in the second quarter of ~~2017, we entered into agreements~~2019.

Aircastle Limited and Subsidiaries

Notes to ~~sell two Boeing 747-400 production freighter aircraft at the end of their respective leases and one older Boeing 747-400 converted freighter aircraft to its lessee, resulting~~Unaudited Consolidated Financial Statements

(Dollars in impairment charges totaling $79,234, partially offset by maintenance revenue of $13,520. During the third quarter of 2017, we sold one production freighter and one converted freighter aircraft. We expect to sell one production freighter aircraft in the first quarter of 2018.thousands, except per share amounts)

June 30, 2019

Annual Recoverability Assessment

We completed our annual recoverability assessment of our aircraft in the second quarter this year. We also performed aircraft-specific analyses where there were changes in circumstances, such as approaching lease expirations. Other than the transactional impairments discussed above, no other impairments were recorded as a result of our annual recoverability assessment.

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

~~Aircastle Limited and Subsidiaries~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollars in thousands, except per share amounts)~~

~~September 30, 2017~~

in contracted and future expected lease rates, residual values, expected scrap values, economic conditions and other factors.

Management believes that the net book value of each aircraft is currently supported by the estimated future undiscounted cash flows expected to be generated by that aircraft, and accordingly, no aircraft were impaired as a consequence of our annual 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 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 ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016 are~~2018 were as follows:



	June 30, 2019				December 31, 2018
	Carrying Amount of Liability		Fair Value of Liability		Carrying Amount of Liability		Fair Value of Liability
Credit Facilities	$	—	$	—	$	425,000	$	425,000
Unsecured Term Loan	215,000		215,000		120,000		120,000
ECA Financings	169,350		173,084		189,080		190,216
Bank Financings	1,059,092		1,075,035		619,715		623,604
Senior Notes	4,100,000		4,240,850		3,450,000		3,446,826

September 30, 2017 December 31, 2016

Carrying Amount
of Liability

Fair Value
of Liability

Carrying
Amount
of Liability

Fair Value
of Liability
Unsecured Term Loan $ 120,000
$ 120,000
$ 120,000
$ 120,000
ECA Financings 236,879
243,880
305,276
316,285
Bank Financings 651,434
649,557
933,541
925,783
Senior Notes 3,200,000
3,422,824
3,200,000
3,387,125

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

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

June 30, 2019

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~~June 30, ~~2017~~2019 were as follows:



Year Ending December 31,	Amount
Remainder of 2019	$	397,081
2020	716,774
2021	607,140
2022	518,834
2023	442,869
Thereafter	720,650
Total	$	3,403,348

Year Ending December 31, Amount
Remainder of 2017 $ 163,587
2018 630,237
2019 532,026
2020 424,140
2021 350,093
Thereafter 830,674
Total $ 2,930,757

~~Aircastle Limited and Subsidiaries~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollars in thousands, except per share amounts)~~

~~September 30, 2017~~

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



	Three Months Ended June 30,				Six Months Ended June 30,
Region	2019		2018		2019		2018
Asia and Pacific	44	%	35	%	43	%	35	%
Europe	28	%	29	%	28	%	29	%
Middle East and Africa	10	%	11	%	11	%	11	%
North America	8	%	8	%	8	%	8	%
South America	10	%	17	%	10	%	17	%

Total	100	%	100	%	100	%	100	%

Three Months Ended September 30, Nine Months Ended September 30,
Region 2017 2016 2017 2016
Asia and Pacific 35 % 40 % 38 % 40 %
Europe 24 % 22 % 23 % 23 %
Middle East and Africa 12 % 12 % 12 % 12 %
North America 9 % 7 % 8 % 6 %
South America 20 % 19 % 19 % 19 %
Total 100 % 100 % 100 % 100 %

The classification of regions in the ~~tables~~table above and in the ~~table~~tables 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% of total lease rental revenue and their combined total percentage of lease rental revenue for the ~~years~~periods indicated:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	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	3	21%	3	19%	3	21%	3	19%

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
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% 4 25% 4 24% 4 25%

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~~periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Country	Revenue		% of Total Revenue	Revenue		% of Total Revenue	Revenue		% of Total Revenue	Revenue		% of Total Revenue	Revenue		% of Total Revenue	Revenue		% of Total Revenue	Revenue		% of Total Revenue	Revenue		% of Total Revenue
Indonesia⁽¹⁾	$	—	—%	$	21,745	11%	$	—	—%	$	61,195	11%
India⁽¹⁾													$	42,312	19%	$	—	—%	$	61,638	14%	$	—	—%

~~_______________~~


~~(1)~~	~~Total revenue attributable to Indonesia was less than 10% for the three and nine months ended September 30, 2017.~~

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

~~September~~June 30, ~~2017~~2019

_______________

(1) For the three and six months ended June 30, 2019, total revenue attributable to India included maintenance revenue of $17,554. For the three and six months ended June 30, 2018, total revenue attributable to India was less than 10%.

Geographic concentration of net book value of flight equipment (including flight equipment held for lease and net investment in ~~finance~~direct financing and sales-type leases, or ~~"net~~“net book ~~value"~~value”) was as follows:


	September 30, 2017			December 31, 2016				June 30, 2019				December 31, 2018
Region	Number of Aircraft	Net Book Value %		Number of Aircraft		Net Book Value %		Number of Aircraft		Net Book Value %		Number of Aircraft		Net Book Value %
Asia and Pacific	54	31	%	61		38	%	91		38	%	78		36	%
Europe	67	28	%	66		23	%	95		27	%	87		27	%
Middle East and Africa	13	9	%	14		11	%	17		8	%	17		8	%
North America	34	11	%	26		8	%	37		11	%	35		10	%
South America	24	21	%	23		18	%	23		13	%	16		10	%
Off-lease	—	—	%	3	⁽¹⁾	2	%	5	⁽¹⁾	3	%	15	⁽²⁾	9	%
Total	192	100	%	193		100	%	268		100	%	248		100	%

_______________


(1)	Consisted of three Airbus A320-200 and one Airbus A330-200 aircraft, which ~~was~~are subject to lease commitments, and one Airbus A330-200 aircraft, which we are marketing for lease or sale.

(2)

Consisted of three Airbus A320-200 aircraft, which are subject to lease commitments, one Airbus A330-200 aircraft, which we are marketing for lease or sale, one Boeing 737-800 aircraft along with one Boeing 777-300ER aircraft, which were delivered on lease to ~~a customer in February 2017, and two~~customers during the first quarter of 2019, seven Airbus ~~A321-200~~A320-200 aircraft, which were ~~both~~ delivered on lease to a customer during the second quarter of ~~2017.~~2019, one Airbus A320-200 aircraft, which was sold during the first quarter of 2019 and one Airbus A330-200 aircraft, which is subject to a lease commitment.

~~At September 30, 2017~~The following table sets forth net book value of flight equipment (includes net book value of flight equipment held for lease and ~~December 31, 2016, no country represented~~net investment in direct financing 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.~~business as of:



	June 30, 2019				December 31, 2018
Country	Net Book Value		Net Book Value %	Number of Lessees	Net Book Value		Net Book Value %	Number of Lessees
India	$	1,036,803	13%	4	$	865,046	12%	4

At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018, the amounts of lease incentive liabilities recorded in maintenance payments on our Consolidated Balance Sheets were ~~$9,637~~$12,236 and ~~$14,931,~~$15,636, respectively.

Note 4. Net Investment in ~~Finance~~Direct Financing and Sales-Type Leases

At ~~September~~June 30, ~~2017~~2019, our net investment in ~~finance~~direct financing and sales-type leases consisted of 2831 aircraft. The following table lists the components of our net investment in ~~finance~~direct financing and sales-type leases at ~~September~~June 30, ~~2017~~2019:



	Amount
Total lease payments to be received	$	254,058
Less: Unearned income	(121,263		)
Estimated residual values of leased flight equipment (unguaranteed)	368,123

Net investment in direct financing and sales-type leases	$	500,918

Amount
Total lease payments to be received $ 297,061
Less: Unearned income (153,253 )
Estimated residual values of leased flight equipment (unguaranteed) 344,600
Net investment in finance and sales-type leases $ 488,408

At ~~September 30, 2017, minimum future lease payments on finance and sales-type leases are as follows:~~

Year Ending December 31, Amount
Remainder of 2017 $ 14,948
2018 54,842
2019 54,507
2020 52,287
2021 42,691
Thereafter 77,786
Total lease payments to be received $ 297,061

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

~~September~~June 30, ~~2017~~2019

At June 30, 2019, minimum future lease payments on direct financing and sales-type leases are as follows:



Year Ending December 31,	Amount
Remainder of 2019	$	34,860
2020	67,035
2021	52,597
2022	42,100
2023	33,093
Thereafter	24,373
Total lease payments to be received	$	254,058

Note 5. Unconsolidated Equity Method Investments

We have joint ventures with an affiliate of Ontario Teachers’ Pension Plan (“Teachers’”) and with the leasing arm of the Industrial Bank of Japan, Limited (“~~IBJL”~~IBJ Air”).

At ~~September~~June 30, ~~2017,~~2019, the net book value of both joint ventures’ ~~thirteen~~fifteen aircraft was ~~approximately $661,000.~~$678,467.



	Amount
Investment in joint ventures at December 31, 2018	$	69,111
Investment in joint ventures	7,551
Earnings from joint ventures, net of tax	2,131

Investment in joint ventures at June 30, 2019	$	78,793

Amount
Investment in joint ventures at December 31, 2016 $ 72,977
Investment in joint ventures 2,117
Earnings from joint ventures, net of tax 5,804
Distributions (4,800 )
Investment in joint ventures at September 30, 2017 $ 76,098

~~The~~Per the partnership agreement with Teachers’, the Company has recorded in its Consolidated Balance Sheet ~~an $11,967~~a $13,565 guarantee liability in Maintenance payments and a $5,100 guarantee liability in Security deposits representing its share of the respective exposures. As of June 30, 2019, there is an executed sales agreement between the joint venture with Teachers’ and a single buyer for aircraft held by the joint venture. All sales are anticipated to be completed by the end of 2019.

In March of 2019, we sold two aircraft to IBJ Air, in which we hold a 25% equity interest. This transaction was approved by our Audit Committee as an arm’s length transaction under our related party policy.

Note 6. Variable Interest Entities

Aircastle consolidates four 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 six aircraft discussed below.

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 six 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.~~our net investment in direct financing and sales-type leases. 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

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

June 30, 2019

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~~June 30, ~~2017~~2019 of ~~$417,439,~~$385,698, 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~~June 30, ~~2017~~2019 is ~~$230,858.~~$166,442.

~~Aircastle Limited and Subsidiaries~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollars in thousands, except per share amounts)~~

~~September 30, 2017~~

Note 7. Secured and Unsecured Debt Financings

The outstanding amounts of our secured and unsecured term debt financings are as follows:


	At September 30, 2017						At December 31, 2016			At June 30, 2019						At December 31, 2018
Debt Obligation	Outstanding Borrowings			Number of Aircraft	Interest Rate	Final Stated Maturity	Outstanding Borrowings			Outstanding Borrowings			Number of Aircraft	Interest Rate	Final Stated Maturity	Outstanding Borrowings
Secured Debt Financings:
ECA Financings⁽¹⁾	$	236,879		6	3.02% to 3.96%	12/03/21 to 11/30/24	$	305,276		$	169,350		6	3.02% to 3.96%	12/03/21 to 11/30/24	$	189,080
Bank Financings⁽²⁾	651,434			23	2.22% to 4.45%	9/11/18 to 01/19/26	933,541			1,059,092			36	3.13% to 5.30%	06/17/23 to 01/19/26	619,715
Less: Debt Issuance Costs	(13,439		)	—			(19,783		)
Total secured debt financings, net of debt issuance costs	874,874			29			1,219,034
Less: Debt issuance costs and discounts										(14,040		)	—			(10,338		)
Total secured debt financings, net of debt issuance costs and discounts										1,214,402			42			798,457

Unsecured Debt Financings:
Senior Notes due 2017	—				6.75%	04/15/17	500,000
Senior Notes due 2018	400,000				4.625%	12/15/18	400,000
Senior Notes due 2019	500,000				6.25%	12/01/19	500,000
Senior Notes due 2019⁽³⁾										500,000				6.25%	12/01/19	500,000
Senior Notes due 2020	300,000				7.625%	04/15/20	300,000			300,000				7.625%	04/15/20	300,000
Senior Notes due 2021	500,000				5.125%	03/15/21	500,000			500,000				5.125%	03/15/21	500,000
Senior Notes due 2022	500,000				5.50%	02/15/22	500,000			500,000				5.50%	02/15/22	500,000
Senior Notes due 2023	500,000				5.00%	04/01/23	500,000
Senior 5.00% Notes due 2023										500,000				5.00%	04/01/23	500,000
Senior 4.40% Notes due 2023										650,000				4.40%	09/25/23	650,000
Senior Notes due 2024	500,000				4.125%	05/01/24	—			500,000				4.125%	05/01/24	500,000
Unsecured Term Loan	120,000				3.320%	04/28/19	120,000
Senior Notes due 2026										650,000				4.250%	06/15/26	—
Unsecured Term Loans										215,000				3.877%	03/07/22 to 03/07/24	120,000
Revolving Credit Facilities	—				N/A	11/21/19 to 05/13/20	—			—				—%	12/27/21 to 06/27/22	425,000
Less: Debt Issuance Costs	(33,760		)				(32,789		)
Total unsecured debt financings, net of debt issuance costs	3,286,240						3,287,211
Less: Debt issuance costs and discounts										(37,269		)				(32,104		)
Total unsecured debt financings, net of debt issuance costs and discounts										4,277,731						3,962,896

Total secured and unsecured debt financings, net of debt issuance costs	$	4,161,114					$	4,506,245
Total secured and unsecured debt financings, net of debt issuance costs and discounts										$	5,492,133					$	4,761,353


(1)	The borrowings under these financings at ~~September~~June 30, ~~2017~~2019 have a weighted-average rate of interest of ~~3.59%~~3.58%.


(2)	The borrowings under these financings at ~~September~~June 30, ~~2017~~2019 have a weighted-average fixed rate of interest of ~~3.45%~~4.04%.


(3)	Repaid on July 15, 2019.

Secured Debt Financing:

Bank Financings

On May 1, 2019, we entered into a full recourse $320,000 secured bank financing with BNP Paribas and Société Générale in relation to eight Airbus A320-200N aircraft on lease with a customer in Asia. This financing bears interest at a

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

June 30, 2019

fixed rate of 3.61% and matures in September 2024. In addition, on May 1, 2019, we entered into a full recourse $120,000 secured bank financing with Crédit Agricole in relation to three Airbus A320-200N aircraft on lease with a customer in Asia. This financing bears interest at a fixed rate of 3.13% and matures in March 2025.

On June 26, 2019, we amended and restated the original loan agreement, dated October 11, 2018, with National Bank of Australia to include an additional $40,000 in financing for two Boeing 737-800 aircraft on lease with a customer in North America. The financing for these two aircraft bears interest at a fixed rate of 3.14% and matures in December 2024.

Unsecured Debt Financings:

Senior Notes due ~~2024~~2026

On ~~March 6, 2017,~~June 13, 2019, Aircastle issued ~~$500,000~~$650,000 aggregate principal amount of Senior Notes due ~~2024~~2026 (the ~~"Senior~~“Senior Notes due ~~2024"~~2026”) at ~~par.~~an issue price of 99.515%. The Senior Notes due ~~2024~~2026 will mature on ~~May 1, 2024~~June 15, 2026 and bear interest at the rate of ~~4.125%~~4.250% per annum, payable semi-annually on ~~May 1~~June 15 and ~~November 1~~December 15 of each year, commencing on ~~November 1, 2017.~~December 15, 2019. Interest accrues on the Senior Notes due ~~2024~~2026 from ~~March 20, 2017.~~June 13, 2019.

Prior to ~~February 1, 2024,~~April 15, 2026, we may redeem all or part of the aggregate principal amount of the Senior Notes due ~~2024~~2026 at any time at a redemption price equal to the greater of (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 100% of the principal amount of the notes redeemed and the remaining scheduled payments of ~~principal and~~ interest on the notes from the redemption date through ~~the maturity date of the notes~~April 15, 2026 (computed using a discount rate equal to the Treasury Rate (as defined in the indenture governing the Senior Notes due 2026) as of such redemption date plus 0.35%, plus accrued and unpaid interest thereon to, but not including, the redemption date). In addition, on or after April 15, 2026, we may redeem all or part of the aggregate principal amount of the Senior Notes due 2026 at a redemption price equal to 100%, plus accrued and unpaid interest thereon to, but not including, the redemption date. If the Company undergoes a change of control (as defined in the indenture governing the Senior Notes due 2026) and, as a result of the change of control, the rating of the Senior Notes due 2026 is downgraded to below an investment grade rating by certain rating agencies in the manner specified in the indenture governing the Senior Notes due 2026, it must offer to repurchase the Senior Notes due 2026 at a price of 101% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the purchase date. The Senior Notes due 2026 are not guaranteed by any of the Company's subsidiaries or any third-party.

The net proceeds from the issuance were used to repay amounts drawn under our existing revolving credit facility and to redeem the balance of our 6.25% Senior Notes due 2019, including accrued interest of $3,733 and call premium of $7,183, on July 15, 2019.

Unsecured Term Loan

On February 27, 2019, we entered into an aggregate $215,000 floating rate loan commitment with Development Bank of Japan Inc. and certain other banks (the “Unsecured Term Loan”). This loan is split into two tranches: Tranche A for $60,000 with a three-year term; and Tranche B for $155,000 with a five-year term. The loan contains a $750,000 minimum net worth covenant, along with other customary provisions similar to our revolving credit facilities. This loan was funded in March 2019.

The new Unsecured Term Loan replaced our existing term loan of $120,000 that matured on April 28, 2019.

Revolving Credit Facility

On December 27, 2018, we entered into a $250,000 three-year, unsecured revolving credit facility with a group of banks based in Asia. This new facility can be increased to a maximum of $350,000. On January 25, 2019, we increased the facility by $30,000 to $280,000. On June 20, 2019, we further increased the facility by $20,000 to $300,000. The facility bears interest at a rate of LIBOR plus 1.50% and matures in December 2021. The facility contains provisions similar to our existing credit facility, including a $750,000 minimum net worth covenant.

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

~~September~~June 30, ~~2017~~2019

~~Rate (as defined~~As a condition to this new facility, on January 9, 2019, we terminated our existing $135,000 revolving credit facility with a group of banks based in the indenture governing the notes) as of such redemption date plus 0.5%). In addition, prior to May 1, 2020, we may redeem up to 40% of the aggregate principal amount of the notes issued under the indenture at a redemption price equal to 104.125% 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 2024 at 101% of the principal amount, plus accrued and unpaid interest. The Senior Notes due 2024 are not guaranteed by any of the Company's subsidiaries or any third-party.

~~On April 17, 2017, we paid off our Senior Notes due 2017.~~

~~Revolving Credit Facilities~~Asia.

At ~~September~~June 30, ~~2017,~~2019, we had no amounts outstanding under ~~these facilities.~~our revolving credit facilities and had $1,100,000 available for borrowing.

As of ~~September~~June 30, ~~2017,~~2019, we were in compliance with all applicable covenants in our financings.

Note 8. Shareholders' Equity and Share-Based Payment

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the Company ~~issued 315,588~~granted 303,331 restricted common shares and ~~issued 224,147~~granted 320,944 performance share units (“PSUs”). These awards were made under the Aircastle Limited Amended and Restated 2014 Omnibus Incentive Plan. We repurchased 157,576 shares totaling $2,915 from our employees and directors to settle tax obligations related to share vesting and canceled shares.

During the ~~nine~~six months ended~~September~~June 30, ~~2017,~~2019, the Company incurred share-based compensation expense of ~~$7,014~~$2,602 related to restricted common shares and ~~$3,622~~$3,301 related to PSUs, of which $1,611 and $1,581, respectively, pertains to accelerated share-based compensation expense in regards to the separation and disability of our former Chief Executive Officer under the terms of his employment and share-based award agreements.PSUs.

As of ~~September~~June 30, ~~2017,~~2019, there was ~~$5,789~~$7,762 of unrecognized compensation cost related to unvested restricted common share-based payments and ~~$4,658~~$10,270 of unrecognized compensation cost related to unvested PSU share-based payments that are expected to be recognized over a weighted-average remaining period of ~~2.6~~1.90 years.

On May 21, 2019, our Board of Directors increased the authorization to repurchase the Company’s common shares to $100,000 from the $76,019 that was remaining under the previous authorization. During the six months ended June 30, 2019, we repurchased 625,744 common shares at an aggregate cost of $11,374, including commissions. At June 30, 2019, the remaining dollar value of common shares that may be purchased under the repurchase program is $97,358.

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
April 30, 2019	$	0.30	$	22,534	May 31, 2019	June 14, 2019
February 8, 2019	$	0.30	$	22,518	February 28, 2019	March 15, 2019
October 30, 2018	$	0.30	$	22,867	November 30, 2018	December 14, 2018
August 3, 2018	$	0.28	$	21,870	August 31, 2018	September 14, 2018
May 1, 2018	$	0.28	$	21,908	May 31, 2018	June 15, 2018

Declaration Date
Dividend per
Common Share

Aggregate
Dividend
Amount
Record Date Payment Date
August 4, 2017 $ 0.26
$ 20,464
August 31, 2017 September 15, 2017
May 2, 2017 $ 0.26
$ 20,482
May 31, 2017 June 15, 2017
February 9, 2017 $ 0.26
$ 20,466
February 28, 2017 March 15, 2017
October 28, 2016 $ 0.26
$ 20,434
November 29, 2016 December 15, 2016
August 2, 2016 $ 0.24
$ 18,872
August 26, 2016 September 15, 2016

Note 10. Earnings ~~Per~~per Share

We include all common shares granted under our incentive compensation plan which remain unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (“participating securities”), in the number of shares outstanding in our basic earnings per share calculations using the two-class method. All of our restricted common shares are currently participating securities. Our PSUs are contingently issuable shares which are included in our diluted earnings per share calculations which do not include voting or dividend rights.

~~Aircastle Limited and Subsidiaries~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollars in thousands, except per share amounts)~~

~~September 30, 2017~~

Under the two-class method, earnings per common share is computed by dividing the sum of distributed earnings allocated to common shareholders and undistributed earnings allocated to common shareholders by the weighted-average number of common shares outstanding for the period. In applying the two-class method, distributed and undistributed

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

June 30, 2019

earnings are allocated to both common shares and restricted common shares based on the total weighted-average shares outstanding during the period.



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Weighted-average shares:
Common shares outstanding	74,650,357		77,910,513		74,676,926		78,137,290
Restricted common shares	524,331		498,433		479,679		464,983
Total weighted-average shares	75,174,688		78,408,946		75,156,605		78,602,273

Percentage of weighted-average shares:
Common shares outstanding	99.30	%	99.36	%	99.36	%	99.41	%
Restricted common shares	0.70	%	0.64	%	0.64	%	0.59	%
Total percentage of weighted-average shares	100.00	%	100.00	%	100.00	%	100.00	%

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Weighted-average shares:
Common shares outstanding 78,237,199
77,989,933
78,197,091
78,230,011
Restricted common shares 569,617
680,249
569,453
646,299
Total weighted-average shares 78,806,816
78,670,182
78,766,544
78,876,310

Percentage of weighted-average shares:
Common shares outstanding 99.28 % 99.14 % 99.28 % 99.18 %
Restricted common shares 0.72 % 0.86 % 0.72 % 0.82 %
Total percentage of weighted-average shares 100.00 % 100.00 % 100.00 % 100.00 %

The calculations of both basic and diluted earnings per share are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Earnings per share – Basic:
Net income	$	57,431		$	27,437		$	92,754		$	83,729		$	31,112		$	50,203		$	65,922		$	107,750
Less: Distributed and undistributed earnings allocated to restricted common shares⁽¹⁾	(415		)	(237		)	(671		)	(686		)	(217		)	(319		)	(421		)	(637		)
Earnings available to common shareholders – Basic	$	57,016		$	27,200		$	92,083		$	83,043		$	30,895		$	49,884		$	65,501		$	107,113

Weighted-average common shares outstanding – Basic	78,237,199			77,989,933			78,197,091			78,230,011			74,650,357			77,910,513			74,676,926			78,137,290

Earnings per common share – Basic	$	0.73		$	0.35		$	1.18		$	1.06		$	0.41		$	0.64		$	0.88		$	1.37

Earnings per share – Diluted:
Net income	$	57,431		$	27,437		$	92,754		$	83,729		$	31,112		$	50,203		$	65,922		$	107,750
Less: Distributed and undistributed earnings allocated to restricted common shares⁽¹⁾	(415		)	(237		)	(671		)	(686		)	(217		)	(319		)	(421		)	(637		)
Earnings available to common shareholders – Diluted	$	57,016		$	27,200		$	92,083		$	83,043		$	30,895		$	49,884		$	65,501		$	107,113

Weighted-average common shares outstanding – Basic	78,237,199			77,989,933			78,197,091			78,230,011			74,650,357			77,910,513			74,676,926			78,137,290
Effect of dilutive shares⁽²⁾	137,810			32,235			169,053			35,804			791,189			337,716			680,507			282,868
Weighted-average common shares outstanding – Diluted	78,375,009			78,022,168			78,366,144			78,265,815			75,441,546			78,248,229			75,357,433			78,420,158

Earnings per common share – Diluted	$	0.73		$	0.35		$	1.18		$	1.06		$	0.41		$	0.64		$	0.87		$	1.37

(1)

For the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, distributed and undistributed earnings to restricted shares were ~~0.72%~~0.70% and ~~0.86%~~0.64%, respectively, of net income. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, distributed and undistributed earnings to restricted shares were ~~0.72%~~0.64% and ~~0.82%~~0.59%, respectively, of net income. The amount of restricted share forfeitures for all periods ~~present is~~presented are immaterial to the allocation of distributed and undistributed earnings.


(2)	For all periods presented, dilutive shares represented contingently issuable shares.

~~Aircastle Limited and Subsidiaries~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollars in thousands, except per share amounts)~~

~~September 30, 2017~~

Note 11. Income Taxes

Income taxes have been provided based on 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

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

June 30, 2019

relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily Ireland ~~Singapore~~ and the United States.

The sources of income from continuing operations before income taxes and earnings of our unconsolidated equity method investments for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
U.S. operations	$	1,959	$	788	$	3,875	$	1,471
Non-U.S. operations	32,658		50,666		69,006		104,904
Income from continuing operations before income taxes and earnings of unconsolidated equity method investments	$	34,617	$	51,454	$	72,881	$	106,375

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
U.S. operations $ 531
$ (92 ) $ 2,029
$ 1,652
Non-U.S. operations 61,799
28,182
93,457
85,469
Income from continuing operations before income taxes and earnings of unconsolidated equity method investments $ 62,330
$ 28,090
$ 95,486
$ 87,121

~~All of our~~Our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are primarily 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~~the U.S. 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~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 was determined based onupon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, ~~2017~~2019 and ~~2016,~~2018, respectively.

The Company’s effective tax rate (“ETR”) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~9.9%~~17.3% and ~~8.9%~~12.5%, respectively, compared to ~~8.8%~~6.1% and ~~10.1%~~2.2%, respectively, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. The second quarter of 2019 included a non-cash tax expense of $2,845 related to a fair value adjustment on an intercompany asset transfer, which was treated as a discrete item. The first quarter of 2018 included a $2,779 tax benefit related to the Singapore rate reduction from 10% to 8%, which was treated as a discrete item. Excluding these discrete items, the ETR for the three and six months ended June 30, 2019 would have been 9.1% and 8.6%, respectively, compared to 6.1% and 4.8%, respectively, for the three and six months ended June 30, 2018. Movements in the ~~effective tax rates~~ETR are generally caused by changes in the proportion of the Company’s pre-tax earnings in taxable and non-tax jurisdictions. During the three and six months ended June 30, 2019, we reported a significant decrease in Bermuda income primarily relating to Avianca Brazil and an increase in Ireland income primarily related to Jet Airways.

Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income from continuing operations consisted of the following:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Notional U.S. federal income tax expense at the statutory rate	$	7,270		$	10,806		$	15,305		$	22,339
U.S. state and local income tax, net	181			55			390			103
Non-U.S. operations:
Bermuda	(2,910		)	(6,112		)	(8,048		)	(14,395		)
Ireland	2,093			(811		)	2,602			(1,128		)
Singapore	(2		)	—			(4		)	(2,824		)
Other low tax jurisdictions	(872		)	(835		)	(1,724		)	(1,643		)
Non-deductible expenses in the U.S.	232			29			569			(164		)
Income tax provision	$	5,992		$	3,132		$	9,090		$	2,288

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

~~September~~June 30, ~~2017~~2019

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Notional U.S. federal income tax expense at the statutory rate $ 21,815
$ 9,831
$ 33,420
$ 30,492
U.S. state and local income tax, net 33
14
122
139
Non-U.S. operations:
Bermuda (12,260 ) (6,025 ) (10,632 ) (16,687 )
Ireland (315 ) 82
(569 ) 2,155
Singapore (1,518 ) (823 ) (9,107 ) (4,874 )
Other low tax jurisdictions (1,450 ) (752 ) (4,377 ) (2,835 )
Non-deductible expenses in the U.S. (104 ) 133
(298 ) 418
Other (6 ) (2 ) (23 ) (26 )
Provision for income taxes $ 6,195
$ 2,458
$ 8,536
$ 8,782

Note 12. Interest, Net

The following table shows the components of interest, net:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Interest on borrowings and other liabilities⁽¹⁾	$	54,527		$	57,589		$	170,225		$	166,692		$	63,639		$	53,979		$	123,918		$	107,957
Amortization of deferred losses related to interest rate derivatives	569			705			1,725			9,074			—			294			184			595
Amortization of deferred financing fees and debt discount⁽²⁾	6,735			4,097			15,860			13,567			3,594			3,510			6,958			7,042
Interest expense	61,831			62,391			187,810			189,333			67,233			57,783			131,060			115,594
Less: Interest income	(1,061		)	(546		)	(2,089		)	(768		)	(856		)	(287		)	(1,220		)	(990		)
Less: Capitalized interest	(134		)	(48		)	(345		)	(75		)	—			(98		)	—			(98		)
Interest, net	$	60,636		$	61,797		$	185,376		$	188,490		$	66,377		$	57,398		$	129,840		$	114,506


~~(1)~~	Includes $1,070 and $2,058 of loan prepayment fees related to the sale of aircraft during the three and nine months ended September 30, 2017, respectively, and $0 and $1,509 of loan prepayment fees related to the sale of aircraft during the three and nine months ended September 30, 2016.

~~(2)~~

Includes $3,019 and $4,005 in deferred financing fees written off related to the prepayment of debt in connection with the sale of aircraft during the three and nine months ended September 30, 2017, respectively, and $0 and $1,972 in deferred financing fees written off related to the prepayment of debt in connection with the sale of aircraft during the three and nine months ended September 30, 2016.

~~Aircastle Limited and Subsidiaries~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollars in thousands, except per share amounts)~~

~~September 30, 2017~~

Note 13. Commitments and Contingencies

Rent expense, primarily for the corporate offices and sales and marketing facilities, was $414 and $563 for the three months ended and $770 and $1,130 for the six months ended June 30, 2019 and 2018, respectively.

As of June 30, 2019, Aircastle is obligated under non-cancelable operating leases relating principally to office facilities in Stamford, Connecticut; Dublin, Ireland; and Singapore for future minimum lease payments as follows:



Year Ending December 31,	Amount
Remainder of 2019	$	1,321
2020	1,872
2021	1,903
2022	1,813
2023	1,699
Thereafter	7,847
Total	$	16,455

At ~~September~~June 30, ~~2017,~~2019, we had commitments to acquire 6432 aircraft for ~~$1,803,810,~~$1,158,069, including 25 Embraer E-Jet E2 aircraft.

Commitments, including ~~$129,218~~$133,955 of remaining progress payments, contractual price escalations and other adjustments for these aircraft, at ~~September~~June 30, ~~2017,~~2019, net of amounts already paid, are as follows:



Year Ending December 31,	Amount
Remainder of 2019	$	220,969
2020	142,588
2021	728,830
2022	65,682
2023	—
Thereafter	—
Total	$	1,158,069

Year Ending December 31, Amount
Remainder of 2017 $ 862,760
2018 52,518
2019 371,673
2020 375,216
2021 141,643
Thereafter —
Total $ 1,803,810
As of August 2, 2019, we had commitments to acquire 39 aircraft for $1,331,994.

Aircastle Limited and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

June 30, 2019

Note 14. Other Assets

The following table describes the principal components of other assets on our Consolidated Balance Sheets as of:


	September 30, 2017		December 31, 2016		June 30, 2019		December 31, 2018
Deferred income tax asset	$	1,736	$	1,902	$	1,216	$	912
Lease incentives and lease premiums, net of amortization of $38,827 and $39,638, respectively	69,721		96,587
Lease incentives and lease premiums, net of amortization of $63,070 and $47,304, respectively					100,743		99,079
Flight equipment held for sale	3,627		3,834		16,817		11,707
Aircraft purchase deposits and progress payments(1)	28,541		12,923		19,050		39,948
Fair value of interest rate cap	2,663		5,735		891		4,886
Note receivable⁽²⁾					1,906		4,292
Right-of-use asset⁽³⁾					9,143		—
Other assets	25,107		27,417		35,936		53,537
Total other assets	$	131,395	$	148,398	$	185,702	$	214,361

______________


(1)	Includes progress payments for Embraer E2 aircraft order.


(2)	Related to the sale of aircraft during the year ended December 31, 2017.


(3)	Net of lease incentives and tenant allowances.

Note 15. Accounts Payable, Accrued Expenses and Other Liabilities

The following table describes the principal components of accounts payable, accrued expenses and other liabilities recorded on our Consolidated Balance Sheets as of:



	June 30, 2019		December 31, 2018
Accounts payable, accrued expenses and other liabilities	$	46,886	$	57,220
Deferred income tax liability	53,271		43,720
Accrued interest payable	47,472		45,277
Lease liability	12,665		—
Lease discounts, net of amortization of $43,123 and $43,935, respectively	4,291		7,124

Total accounts payable, accrued expenses and other liabilities	$	164,585	$	153,341

September 30,
2017 December 31,
2016
Accounts payable and accrued expenses $ 33,499
$ 24,337
Deferred income tax liability 42,706
44,241
Accrued interest payable 56,611
43,107
Lease discounts, net of amortization of $35,296 and $29,016, respectively 12,875
15,842
Total accounts payable, accrued expenses and other liabilities $ 145,691
$ 127,527

~~Aircastle Limited and Subsidiaries~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollars in thousands, except per share amounts)~~

~~September 30, 2017~~

~~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,
2017 2016 2017 2016
Beginning balance $ (2,396 ) $ (4,845 ) $ (3,552 ) $ (13,213 )
Amounts recognized in other comprehensive loss on derivatives, net of tax expense of $0 for all periods presented —
—
—
(690 )
Amounts reclassified from accumulated other comprehensive loss into income, net of tax expense of $0 for all periods presented 569
705
1,725
9,763
Net current period other comprehensive income 569
705
1,725
9,073
Ending balance $ (1,827 ) $ (4,140 ) $ (1,827 ) $ (4,140 )

~~(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,
2017 2016 2017 2016
Amount of effective amortization of net deferred interest rate derivative losses⁽²⁾
$ 569
$ 705
$ 1,725
$ 9,074
Effective amount of net settlements of interest rate derivatives, net of tax expense of $0 for all periods presented —
—
—
689
Amount of loss reclassified from accumulated other comprehensive loss into income $ 569
$ 705
$ 1,725
$ 9,763

~~(1) All amounts are net of tax.~~

~~(2) Included in interest expense.~~

At September 30, 2017, 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 $1,361.

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, ~~2016~~2018 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 ~~2016~~2018 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 — Financial Information — 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).~~PFIC Information.”

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, 201 Tresser Boulevard, Suite 400, Stamford, Connecticut 06901.

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.

OVERVIEW

Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. As of ~~September~~June 30, ~~2017,~~2019, we owned and managed on behalf of our joint ventures ~~205~~283 aircraft leased to 7189 lessees located in 3847 countries. 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. In many cases ~~however,~~ we are, however, obligated to pay a specified portion of ~~specified~~ maintenance or modification costs. As of ~~September~~June 30, ~~2017,~~2019, the net book value (including flight equipment held for lease and net investment in ~~finance~~direct financing and sales-type leases, or ~~"net~~“net book ~~value"~~value”) was ~~$5.98~~$7.84 billion compared to ~~$6.51~~$7.40 billion at December 31, ~~2016.~~2018. Our revenues and net income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 were ~~$191.4~~$223.4 million and $437.3 million, and ~~$57.4~~$31.1 million and ~~$619.2 million and $92.8~~$65.9 million, respectively.

Growth in commercial air traffic is broadly correlated with world economic activity. In recent years, itcommercial air traffic growth has ~~been expanding~~expanded at a rate ~~one and a half~~1.5 to ~~two~~2 times that of global GDP growth. The expansion of air travel has driven a rise in the world aircraft fleet. There are currently approximately ~~20,000~~22,000 commercial mainline passenger and freighter aircraft in operation worldwide. This fleet is expected to continue expanding at a three to four percent average annual rate over the next twenty years. Aircraft leasing companies own approximately ~~41%~~44% of the world’s commercial jet aircraft.

2019 continues to show strong growth in air traffic. According to the International Air Transport Association, during the first five months of 2019, global passenger traffic increased 4.6% compared to the same period in 2018. Demand for air travel varies by region. Emerging market economies have generally been experiencing greater increases in air traffic, driven by rising levels of per capita income leading to an increased propensity to fly. Mature markets, such as North America and Western Europe, have been growing more slowly in tandem with their economies. Air traffic growth is also being driven by the proliferation of low cost carriers, which have stimulated demand through lower prices. The outlook for airlines operating in areas with political instability or weakening economies 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.

Notwithstanding the sector’s long-term growth, the aviation ~~markets have been, and are expected to remain,~~market is subject to economic variability due to changes in macroeconomic variables, such as interest rates, fuel price levels and foreign exchange rates. The aviation industry is also susceptible to external shocks, such as regional conflicts and terrorist events. Mitigating this risk is the portability of the assets, allowing aircraft to be redeployed to locations where ~~demand~~there is ~~higher.~~demand.

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 2017, global passenger traffic increased 7.9% compared to the same period in 2016. During the first eight months of 2017, air cargo traffic increased 10.5% compared to the same period in 2016, and capacity increased 3.8%, resulting in an increase in load factors to 43.3%.

Demand for air travel varies considerably by region. Emerging market economies have generally been experiencing greater increases in air traffic, driven by rising levels of per capita income. Air traffic growth is also being driven by the proliferation of low cost carriers, which have stimulated demand through lower prices. Mature markets, such as North America and Western Europe, are likely to grow more slowly in tandem with their economies. Persian Gulf-based Emirates, Qatar Airways and Etihad Airways are also showing signs of reaching maturity. Airlines operating in areas with political instability or weakening economies 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~~Fuel prices and interest rates have had a substantial effect on our industry. ~~The price~~After dropping to a low of ~~oil dropped by $67 to~~ $36 per barrel in December 2015, the ~~four years prior~~price of fuel has risen to ~~December 2015. This allowed airlines to reduce ticket~~an average of $61 per barrel during 2019. While still below historic highs, higher fuel prices ~~and stimulate aircraft traffic while retaining enough of this benefit to achieve record profit levels. A~~have impacted airline profitability. The prolonged low interest rate environment and the strong overall performance of the aircraft financing sector attracted significant new capital, increasing competition for new ~~investments. The downward trend in fuel prices~~investments and putting pressure on margins and returns. After the Federal Reserve increased interest rates ~~appears to have ended as fuel prices started rising in 2016. In 2017, the price of fuel has averaged approximately $50 per barrel. Likewise, interest rates have started to rise~~ in the U.S.~~, with~~ during 2018, the Federal Reserve ~~guidance suggesting multiple future~~moved to cut the Funds rate ~~hikes subsequent~~by 25 basis points on July 31, 2019, its first interest rate cut since December 2008. Future cuts to the ~~December 2016 increase in~~interest rate by the Federal ~~Funds rate.~~Reserve are possible depending upon domestic and global economic conditions at such time.

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 investment 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~~benefit borrowers by permitting access to financing at historic lows while higher fees have driven down 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.lows. Commercial bank debt also continues to play a critical role for aircraft ~~finance, although we believe regulatory pressures may limit its role over time.~~

finance. Export credit agency availability, however, has been curtailed due to political issues, both in the U.S. and in Europe. While financial ~~markets~~market conditions ~~are currently~~remain attractive, ~~heightened volatility stemming from global growth concerns and various~~ geopolitical issues may increase capital costs and limit availability going forward.

We believe ~~these~~capital market ~~forces~~developments should generate attractive ~~new~~additional investment and trading opportunities for 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~~ Our investment grade credit ~~rating, which we believe will~~ratings from Moody’s, Standard & Poor’s and Fitch allowed us to reduce our borrowing costs for our two most recent bond deals and will enable us to more ~~reliable~~reliably access to debt capital throughout the business cycle.

~~We believe our~~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~~the nature and ~~growth rates~~volume of assets we buy will vary over time with market conditions. We plan to grow our business and profits over the long-term while maintaining

a conservative, flexible capital structure. 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.~~investments than many of our competitors.

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. We carefully evaluate investments across different aircraft models, ages, lessees and acquisition sources and re-evaluate these choices 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. 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. This approach sets us apart from most other large aircraft leasing companies.

~~Originating investments from many different sources across the globe.~~Our strategy is to seek out worthwhile investments by 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 86 different sellers.

~~Selling assets when attractive opportunities arise.~~ We sell assets with the aim of realizing profits and reinvesting proceeds when a sale generates the greatest expected cash flow or when 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.

~~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 influenced by the business cycle. 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 important to maintain access to a wide variety of financing sources. Our objective 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.

~~Leveraging our strategic relationships.~~ We intend to capture the benefits provided through the extensive global contacts and relationships maintained by Marubeni, 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 joint venture with IBJL (“IBJ Air”). IBJ Air is targeted at newer narrow-body aircraft leased to premier airlines, providing Aircastle with increased access to this market sector and to these customers. Our joint venture with Teachers’ (“Lancaster”) provides us with an opportunity to pursue larger transactions, manage portfolio concentrations and improve our return on deployed capital.

~~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 places us in a favorable position to source and manage new income-generating activities. We intend to continue to focus our efforts in areas where we believe we have competitive advantages, including new direct investments as well as ventures with strategic business partners.

~~Intending to pay quarterly dividends to our shareholders based on the Company’s sustainable earnings levels.~~ Aircastle has paid dividends each quarter since our initial public offering in 2006. On August 4, 2017, our Board of Directors declared a regular quarterly dividend of $0.26 per common share, or an aggregate of $20.5 million for the three months ended September 30, 2017, which was paid on September 15, 2017 to holders of record on August 31, 2017. 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 2016 Annual Report on Form 10-K.~~

•

Pursuing a disciplined and differentiated investment strategy. In our view, the relative values of different aircraft change over time. We continually evaluate investments across different aircraft models, ages, lessees and acquisition sources and re-evaluate these choices as market conditions and relative investment values change. We believe our team’s experience with a wide range of asset types and the financing flexibility offered through unsecured debt provides us with a competitive advantage. We view orders from equipment manufacturers to be part of our investment opportunity set, but choose to keep our long term capital commitments limited.

•

Originating investments from many different sources across the globe.Our strategy is to seek out worthwhile investments by leveraging our team’s wide range of contacts. 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 94 different sellers.


•	Selling assets when attractive opportunities arise. We sell assets with the aim of realizing profits and reinvesting proceeds. We also use asset sales for portfolio management purposes, such as reducing lessee specific concentrations and lowering residual value exposures to certain aircraft types. Since our formation, we have sold aircraft to 67 buyers.

•

Maintaining efficient access to capital from a wide set of sources and leveraging our recent investment grade credit rating. We believe the aircraft investment market is influenced by the business cycle. Our strategy is to increase our purchase activity when prices are low and to emphasize asset sales when prices are high. To implement this approach, we believe it is important to maintain access to a wide variety of financing sources. During 2018, we achieved our objective of improving 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 our improved credit rating will not only reduce our borrowing costs, but also facilitate more reliable access to both unsecured and secured debt capital throughout the business cycle.

•

Leveraging our strategic relationships. We intend to capture the benefits provided through the extensive global contacts and relationships maintained by Marubeni, which is our largest shareholder and is one of the largest Japanese trading companies. Marubeni has enabled greater access to Japanese-based financing and helped source and develop our joint venture with the leasing arm of the Industrial Bank of Japan, Limited.

•

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 places us in a favorable position to source and manage new income-generating activities. We intend to continue to focus our efforts in areas where we believe we have competitive advantages, including new direct investments as well as ventures with strategic business partners.

•

Intending to pay quarterly dividends to our shareholders based on the Company’s sustainable earnings levels. Aircastle has paid dividends each quarter since our initial public offering in 2006. On April 30, 2019, our Board of Directors declared a regular quarterly dividend of $0.30 per common share, or an aggregate of $22.5 million for the three months ended June 30, 2019, which was paid on June 14, 2019 to holders of record on May 31, 2019. 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 2018 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~~direct financing and sales-type ~~leases.~~leases and gains from aircraft sales.

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 or near 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.

On April 10, 2019, the Company early terminated the leases for seven Boeing 737NG aircraft on lease to Jet Airways (India) Limited equipped with CFM56-7B engines. The Company repossessed all seven aircraft and transitioned them to a new lessee. As a result of the lease terminations of these seven aircraft, the Company recognized net maintenance revenue of $17.6 million and impairment charges of $7.4 million in the second quarter of 2019. For more information regarding risks associated with our lessees see Item 1A. “Risk Factors - Risks Related to Our Lessees” in our 2018 Annual Report on Form 10-K.

~~2017~~2019 Lease Expirations and Lease Placements

At ~~September~~June 30, ~~2017,~~2019, the Company had five aircraft off-lease and twelve aircraft with scheduled lease expirations in 2019. As of August 2, 2019, we ~~had two~~have three aircraft ~~accounting~~which account for ~~less than~~ 1% of our net book value ~~that are scheduled~~at June 30, 2019, still to ~~come off lease during 2017 for which we have not yet secured lease~~be placed or ~~sales commitments. We are marketing these aircraft for sale.~~sold.

~~2018-2021~~2020-2023 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 ~~2018-2021,~~2020-2023, representing the percentage of our net book value of flight equipment

~~(including~~ (including flight equipment held for lease and net investment in ~~finance~~direct financing and sales-type leases) at ~~September~~June 30, ~~2017,~~2019, specified below:

~~2018: 10~~2020: 21 aircraft, representing 6%7%;

~~2019: 28~~2021: 20 aircraft, representing ~~18%~~5%;

~~2020: 25~~2022: 31 aircraft, representing 9%; and

~~2021: 23~~

2023: 36 aircraft, representing ~~12%~~11%.

Operating Expenses

Operating expenses are comprised of depreciation of flight equipment held for lease, interest expense, selling, general and administrative expenses, aircraft impairment charges and maintenance and other costs. Because our operating lease terms generally require the lessee to pay for operating, maintenance and insurance costs, our portion of maintenance and other costs relating to aircraft reflected in our statement of income primarily relates to expenses for scheduled transitions and unscheduled lease terminations.

Income Tax Provision

We obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not, until March 2035, be applicable to us or to any of our operations or to our shares, debentures or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. Consequently, the provision for income taxes recorded relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily ~~Ireland, Singapore and~~ the United ~~States.~~States and Ireland.

~~All of our~~Our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are primarily 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~~the U.S. are subject to tax in those respective jurisdictions.

We have a ~~U.S.-based~~U.S. based subsidiary which provides management services to our ~~non-U.S.~~ subsidiaries and is subject to U.S. federal, state and local income taxes. We also have Ireland and Singapore based subsidiaries which provide management services to our non-U.S. subsidiaries and are subject to tax in those respective jurisdictions.

Acquisitions and Sales

During the first ~~nine~~six months of ~~2017,~~2019, we acquired 2824 aircraft for ~~$635.1~~$769.6 million. As of ~~October 31, 2017,~~August 2, 2019, we have acquired ~~37 aircraft for approximately $760 million.~~two additional aircraft. At ~~September~~June 30, ~~2017,~~2019, we had commitments to acquire 6432 additional aircraft for ~~$1.80~~$1.16 billion, including the acquisition of 25 new E-Jet E2 aircraft from Embraer, ~~which are scheduled to deliver~~with delivery beginning in ~~2019 to 2021.~~the third quarter of 2020. Of this amount, approximately $221.0 million represents commitments for the remainder of 2019. As of ~~October 31, 2017,~~August 2, 2019, we have commitments to acquire 5539 aircraft for ~~$1.68~~$1.33 billion.

During the first ~~nine~~six months of ~~2017,~~2019, we sold 29four aircraft for ~~$765.0~~net proceeds of $56.9 million, ~~which resulted in a~~and recognized net ~~gain~~gains on sales of ~~$35.9 million. During October 2017, we sold one narrow-body~~$12.3 million, comprised of $8.6 million from the sale of these aircraft and $3.7 million resulting from the transition of two aircraft from operating to net investment in direct financing and sales-type leases. As of August 2, 2019, we have sold two additional aircraft. As of August 2, 2019, one ~~classic narrow-body aircraft.~~aircraft was sold from the Company’s joint venture with an affiliate of Ontario Teachers’ Pension Plan.

The following table sets forth certain information with respect to the aircraft owned by us as of ~~September~~June 30, ~~2017~~2019:

AIRCASTLE AIRCRAFT INFORMATION (dollars in millions)


Owned Aircraft	As of September 30, 2017⁽¹⁾			As of September 30, 2016⁽¹⁾			As of June 30, 2019⁽¹⁾			As of June 30, 2018⁽¹⁾
Net Book Value of Flight Equipment	$	5,979		$	6,270		$	7,842		$	6,776
Net Book Value of Unencumbered Flight Equipment	$	4,572		$	4,343		$	5,957		$	5,419
Number of Aircraft	192			175			268			228
Number of Unencumbered Aircraft	163			139			226			199
Number of Lessees	71			65			89			84
Number of Countries	38			35			47			45
Weighted Average Age (years)⁽²⁾	8.7			7.6			9.5			9.5
Weighted Average Remaining Lease Term (years)⁽²⁾	4.7			5.3			4.6			4.7
Weighted Average Fleet Utilization during the three months ended September 30, 2017 and 2016⁽³⁾	100.0		%	98.2		%
Weighted Average Fleet Utilization during the nine months ended September 30, 2017 and 2016⁽³⁾	99.2		%	98.9		%
Portfolio Yield for the three months ended September 30, 2017 and 2016⁽⁴⁾	12.3		%	12.4		%
Portfolio Yield for the nine months ended September 30, 2017 and 2016⁽⁴⁾	12.3		%	12.4		%
Weighted Average Fleet Utilization during the three months ended June 30, 2019 and 2018⁽³⁾							94.0		%	99.5		%
Weighted Average Fleet Utilization during the six months ended June 30, 2019 and 2018⁽³⁾							93.9		%	99.4		%
Portfolio Yield for the three months ended June 30, 2019 and 2018⁽⁴⁾							10.7		%	11.5		%
Portfolio Yield for the six months ended June 30, 2019 and 2018⁽⁴⁾							10.6		%	11.5		%

Managed Aircraft on behalf of Joint Ventures
Net Book Value of Flight Equipment	$	661		$	629		$	678		$	628
Number of Aircraft	13			11			15			12


(1)	Calculated using net book value at period end.


(2)	Weighted by net book value.


(3)	Aircraft on-lease days as a percent of total days in period weighted by net book value. The decrease from our historical utilization rate was due to the early termination of the leases for eleven aircraft from Avianca Brazil and seven aircraft from Jet Airways.

(4)

Lease rental revenue, interest income and cash collections on our net investment in ~~finance~~direct financing and sales-type leases for the period as a percent of the average net book value for the period; quarterly information is annualized. The decrease from our historical portfolio yield was due to the early termination of the leases for eleven aircraft from Avianca Brazil and seven aircraft from Jet Airways. The calculation of portfolio yield includes our net investment in direct financing and sales-type leases in the average net book value, and the interest income and cash collections from our net investment in direct financing and sales-type leases in lease rentals.

Our owned aircraft portfolio as of ~~September~~June 30, ~~2017~~2019 is listed in Exhibit 99.1 to this report.

PORTFOLIO DIVERSIFICATION


	Owned Aircraft as of September 30, 2017			Owned Aircraft as of September 30, 2016				Owned Aircraft as of June 30, 2019				Owned Aircraft as of June 30, 2018
	Number of Aircraft	% of Net Book Value⁽¹⁾		Number of Aircraft		% of Net Book Value⁽¹⁾		Number of Aircraft		% of Net Book Value⁽¹⁾		Number of Aircraft	% of Net Book Value⁽¹⁾
Aircraft Type
Passenger:
Narrow-body	159	60	%	134		52	%	238		74	%	196	67	%
Wide-body	28	34	%	32		40	%	26		22	%	28	29	%
Total Passenger	187	94	%	166		92	%	264		96	%	224	96	%
Freighter	5	6	%	9		8	%	4		4	%	4	4	%
Total	192	100	%	175		100	%	268		100	%	228	100	%

Manufacturer
Airbus	108	53	%	87		50	%	167		60	%	137	56	%
Boeing	79	45	%	83		48	%	96		38	%	86	42	%
Embraer	5	2	%	5		2	%	5		2	%	5	2	%
Total	192	100	%	175		100	%	268		100	%	228	100	%

Regional Diversification
Asia and Pacific	54	31	%	55		39	%	91		38	%	62	30	%
Europe	67	28	%	57		22	%	95		27	%	87	30	%
Middle East and Africa	13	9	%	14		11	%	17		8	%	17	9	%
North America	34	11	%	24		8	%	37		11	%	36	12	%
South America	24	21	%	23		19	%	23		13	%	26	19	%
Off-lease	—	—	%	2	⁽²⁾	1	%	5	⁽²⁾	3	%	—	—	%

Total	192	100	%	175		100	%	268		100	%	228	100	%


(1)	Calculated using net book value at period end.


(2)	Consisted of ~~two Boeing 737-800~~three Airbus A320-200 aircraft ~~that were delivered~~and one Airbus A330-200 aircraft, which are subject to ~~a customer in China in October 2016.~~lease commitments, and one Airbus A330-200 aircraft, which we are marketing for lease or sale.

Our largest single customer represents ~~over 6%~~approximately 10% of the net book value at ~~September~~June 30, ~~2017~~.2019. Our top fifteen customers ~~for~~with respect to aircraft we owned at ~~September~~as of June 30, ~~2017~~2019, representing 87134 aircraft and ~~58%~~54% of the net book value, are as follows:



Percent of Net Book Value	Customer	Country	Number of Aircraft
Greater than 6% per customer	~~Avianca Brazil~~IndiGo	~~Brazil~~India	19
	LATAM	Chile	10

3% to 6% per customer	~~LATAM~~	~~Chile~~	3
	Lion Air	Indonesia	1011
	~~TAP Portugal~~⁽¹⁾ Iberia	~~Portugal~~Spain	815
	South African Airways	South Africa	4
	~~Aerolineas Argentina~~easyJet	~~Argentina~~United Kingdom	520
	~~AirBridgeCargo~~⁽²⁾	~~Russia~~	2
	~~Iberia~~	~~Spain~~	10
	~~Jet Airways~~	~~India~~	8

Less than 3% per customer	Jeju Air	South Korea	9
	Aerolineas Argentinas	Argentina	5
	Interjet	Mexico	11
	TAP Portugal⁽¹⁾	Portugal	6
	American Airlines	United States	7
	SpiceJet	India	9
	AirBridgeCargo⁽²⁾	Russia	2
	AirAsia X	Malaysia	2
	~~Avianca~~	~~Colombia~~	2
	~~Thai Airways~~	~~Thailand~~	1
	~~easyJet~~	~~United Kingdom~~	10
	Air Canada	Canada	34
	Total top fifteen customers		87134
	All other customers		~~105~~134

	Total all customers		~~192~~268


(1)	Combined with an affiliate.


(2)	Guaranteed by Volga-Dnepr Airlines. We have one additional aircraft on lease with an affiliate.

Finance

We believe that cash on hand, payments received from lessees and other funds generated from operations, secured borrowings for aircraft, borrowings under our revolving credit facilities and other borrowings and proceeds from future aircraft sales will be sufficient to satisfy our liquidity and capital resource needs over the next twelve months. We may repay all or a portion of such borrowings from time to time with the net proceeds from subsequent long-term debt financings, additional equity offerings or cash generated from operations and asset sales. Therefore, our ability to execute our business strategy, particularly the acquisition of additional commercial jet aircraft or other aviation assets, depends to a significant degree on our ability to obtain additional debt and equity capital on terms we deem attractive.

See “Liquidity and Capital Resources” below.

RESULTS OF OPERATIONS

Comparison of the three months ended ~~September~~ June 30, ~~2017~~2019 to the three months ended ~~September~~ June 30, ~~2016:~~2018:


	Three Months Ended September 30,						Three Months Ended June 30,
	2017			2016			2019				2018
	(Dollars in thousands)						(Dollars in thousands)
Revenues:
Lease rental revenue	$	171,687		$	181,975		$	192,823			$	178,486
Finance and sales-type lease revenue	6,412			5,354
Amortization of net lease discounts and lease incentives	(2,388		)	(521		)
Direct financing and sales-type lease revenue							8,321				8,868
Amortization of lease premiums, discounts and incentives							(5,345		)		(3,534		)
Maintenance revenue	14,507			6,829			26,567				—
Total lease revenue	190,218			193,637			222,366				183,820
Gain on sale of flight equipment							346				19,864
Other revenue	1,193			1,015			704			��	592
Total revenues	191,411			194,652			223,416				204,276
Operating expenses:
Depreciation	70,018			76,201			89,578				76,181
Interest, net	60,636			61,797			66,377				57,398
Selling, general and administrative	17,137			15,985			18,317				18,583
Impairment of aircraft	—			10,462
Impairment of flight equipment							7,404				—
Maintenance and other costs	2,572			1,834			5,213				1,561
Total operating expenses	150,363			166,279			186,889				153,723
Other income (expense):
Gain (loss) on sale of flight equipment	21,642			(73		)
Other	(360		)	(210		)

Total other income (expense)	21,282			(283		)	(1,910		)		901

Income from continuing operations before income taxes and earnings of unconsolidated equity method investments	62,330			28,090			34,617				51,454
Income tax provision	6,195			2,458			5,992				3,132
Earnings of unconsolidated equity method investments, net of tax	1,296			1,805			2,487				1,881
Net income	$	57,431		$	27,437		$	31,112			$	50,203

Revenues

Total revenues~~decreased~~ increased by ~~$3.2~~$19.1 million for the three months ended~~September~~June 30, ~~2017~~2019 as compared to the three months ended~~September~~June 30, ~~2016~~2018.

Lease rental revenue. The ~~decrease~~increase in lease rental revenue of ~~$10.3~~$14.3 million for the three months ended~~September~~June 30, ~~2017~~2019, as compared to the same period in ~~2016~~2018, was primarily the result ~~of:~~of a $45.2 million increase in revenue, reflecting the partial period impact of 23 aircraft purchased in 2019 and the full period impact due to the acquisition of 33 aircraft since April 1, 2018. This increase was partially offset by:

a ~~$32.8~~$8.2 million decrease due to the sale of 40eleven aircraft since ~~September 30, 2016;~~April 1, 2018; and

a ~~$6.7~~$22.7 million decrease due to lease extensions, amendments, transitions and other ~~changes.~~changes ($15.2 million of which is attributable to Avianca Brazil and Jet Airways).

~~This decrease was partially offset by an increase in revenue of $29.2 million due to the acquisition of 50 aircraft since September 30, 2016.~~

~~Finance~~Direct financing and sales-type lease revenue. For the three months ended~~September~~ June 30, ~~2017, $6.4~~2019, $8.3 million of interest income from ~~finance~~direct financing and sales-type leases was recognized, as compared to ~~$5.4~~$8.9 million of interest income from ~~finance~~direct financing and sales-type leases recorded for the same period in ~~2016~~,2018, due to the ~~addition~~termination of ~~fifteen aircraft,~~one lease, partially offset by the ~~sale~~reclassification of two aircraft ~~over the last twelve months.~~from operating to direct financing and sales-type leases.

Amortization of net lease premiums, discounts and lease incentives consisted of the following:


	Three Months Ended September 30,						Three Months Ended June 30,
	2017			2016			2019			2018
	(Dollars in thousands)						(Dollars in thousands)
Amortization of lease incentives	$	(1,810	)	$	42		$	(2,491	)	$	(2,924	)
Amortization of lease premiums	(2,266		)	(2,894		)	(4,261		)	(2,613		)
Amortization of lease discounts	1,688			2,331			1,407			2,003
Amortization of net lease discounts and lease incentives	$	(2,388	)	$	(521	)

Amortization of lease premiums, discounts and incentives							$	(5,345	)	$	(3,534	)

As more fully described above under “Revenues,” lease incentives represent our estimated portion of the lessee’s cost for heavy maintenance, overhaul or replacement of certain high-value components, which are amortized over the life of the related lease. As we enter into new leases, the amortization of lease incentives generally increases and, conversely, if a related lease terminates, the related unused lease incentive liability will reduce the amortization of lease incentives. The increase in amortization of lease ~~incentives~~premiums of ~~$1.9~~$1.6 million for the three months ended ~~September~~June 30, ~~2017,~~2019, as compared to the same period in ~~2016,~~2018, was ~~primarily attributable to the reversal of lease incentives associated with one freighter aircraft~~ due to ~~changes~~a net increase in ~~estimate and the reclassification of one~~amortization resulting from net aircraft ~~from an operating lease to a finance lease.~~acquisitions.

Maintenance revenue. For the three months ended ~~September~~June 30, ~~2017,~~2019, we recorded ~~$14.5~~$26.6 million of maintenance revenue primarily due to the transition of ~~one~~ten narrow-body and one wide-body aircraft, including $17.6 million related to the early lease terminations with Jet Airways. See “Summary of ~~$13.1 million.~~Recoverability Assessment and Other Impairments” below. For the same period in ~~2016,~~2018, we recorded ~~$6.8~~no maintenance revenue.

Gain on sale of flight equipment decreased by $19.5 million ~~of maintenance revenue, including $5.6~~to $0.3 million ~~related to maintenance reserves taken into income~~ for ~~three freighter aircraft.~~

~~Other revenue.~~ ~~For~~ the three months ended ~~September~~June 30, ~~2017, we recorded $1.2~~2019, as compared to gains of $19.9 million ~~of other revenue, primarily from fees earned from one lessee in connection with the early termination of a lease. For~~for the same period in ~~2016, we recorded $1.0 million~~2018. During the second quarter of ~~other revenue.~~2019, no aircraft were sold as compared to four aircraft sold during the second quarter of 2018.

Operating expenses

Total operating expenses ~~decreased~~ increased by ~~$15.9~~$33.2 million for the three months ended~~September~~June 30, ~~2017~~2019, as compared to the three months ended~~September~~June 30, ~~2016~~2018.

Depreciation expense ~~decreased~~ increased by ~~$6.2~~$13.4 million for the three months ended~~September~~June 30, ~~2017~~2019 as compared to the same period in ~~2016~~2018. The ~~decrease~~increase is primarily the result of ~~lower~~higher depreciation ~~of $18.8~~of:

$16.9 million due to 40the effect of 56 aircraft ~~sold.~~

~~This decrease was partially offset by increases of:~~

~~$11.0 million due to 50 aircraft acquired;~~acquired since April 1, 2018; and

$~~1.6~~0.9 million due to changes in asset lives, residual values and other changes.

These increases were partially offset by a decrease of $4.5 million in depreciation due to the sale of eleven aircraft.

Interest, net consisted of the following:


	Three Months Ended September 30,						Three Months Ended June 30,
	2017			2016			2019			2018
	(Dollars in thousands)						(Dollars in thousands)
Interest on borrowings, net of settlements on interest rate derivatives, and other liabilities⁽¹⁾	$	54,527		$	57,589
Amortization of interest rate derivatives related to deferred losses	569			705
Interest on borrowings and other liabilities							$	63,639		$	53,979
Amortization of deferred losses related to interest rate derivatives							—			294
Amortization of deferred financing fees and debt discount⁽²⁾	6,735			4,097			3,594			3,510
Interest expense	61,831			62,391			67,233			57,783
Less: Interest income	(1,061		)	(546		)	(856		)	(287		)
Less: Capitalized interest	(134		)	(48		)	—			(98		)
Interest, net	$	60,636		$	61,797		$	66,377		$	57,398

~~(1) Includes $1.1~~Interest, net increased by $9.0 million ~~of loan prepayment fees related~~as compared to ~~the sale of aircraft during~~ the three months ended ~~September~~June 30, ~~2017.~~

~~(2) Includes $3.0 million in deferred financing fees written off related to~~2018. This increase was primarily the ~~prepayment of debt in connection with the sale of aircraft during the three months ended September 30, 2017.~~

~~Interest, net decreased by $1.2 million over the three months ended September 30, 2016. The net decrease is primarily a~~ result of ~~lower interest on borrowings of $3.1 million, primarily due to lower~~higher weighted average debt outstanding, and higher interest income of $0.5 million, partially offset by higher amortization of deferred financing fees and debt discount of $2.6 million during the three months ended September 30, 2017 as compared to a year ago.outstanding.

Selling, general and administrative expenses for the three months ended~~September~~ June 30, ~~2017~~ ~~increased by $1.2 million over~~2019 were flat as compared to the same period in ~~2016.~~2018.

Impairment of ~~Aircraft.~~ Flight Equipment. See “Summary of ~~Impairments~~Recoverability Assessment and ~~Recoverability Assessment”~~Other Impairments” below for a detailed discussion of impairment charges related to certain aircraft.

Maintenance and other costs were $5.2 million for the three months ended June 30, 2019, an increase of $3.7 million compared to the same period in 2018. The net increase is primarily attributable to eighteen unscheduled transitions due to early lease terminations related to Avianca Brazil and Jet Airways for the three months ended June 30, 2019 versus the same period in 2018.

Other income (expense)

~~Gain (loss) on sale of flight equipment~~ ~~increased~~Total other income (expense) decreased by ~~$21.7 million to $21.6~~$2.8 million for the three months ended ~~September~~June 30, ~~2017,~~2019 as compared ~~with a loss of $0.1 million for~~to the ~~same period~~three months ended June 30, 2018. The net decrease in ~~2016. During the third quarter of 2017, we sold fifteen aircraft. During the third quarter of 2016, we recorded gains totaling $7.8 million and losses totaling $7.9 million, primarily due~~other income was attributable to ~~a loss of $5.2 million for a wide-body aircraft’s lease extension classified as a sales-type lease.~~unfavorable mark-to-market adjustments on our interest rate caps.

Income tax provision

Our provision for income taxes for the three months ended ~~September~~ June 30, ~~2017~~2019 and ~~2016~~2018 was $~~6.2~~6.0 million and $~~2.5~~3.1 million, respectively. Income taxes have been provided based on the applicable tax laws and rates of those countries in which operations are conducted and income is earned, primarily Ireland ~~Singapore~~ and the United States. The increase in our income tax provision of ~~approximately $3.7~~$2.9 million for the three months ended~~September~~June 30, ~~2017~~2019, as compared to the same period in ~~2016~~2018, was primarily attributable to changes in operating income subject to tax in Ireland, ~~Singapore,~~ the United States and other ~~jurisdictions.~~jurisdictions, and the recording of a $2.8 million non-cash tax expense related to a fair value adjustment on an intercompany asset transfer, which was treated as a discrete item. Excluding this discrete item, the income tax provision for the three months ended June 30, 2019 would have been $3.1 million.

~~All of our~~Our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are primarily 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. In addition, we 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 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 recorded relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily the United States and Ireland.

~~Other comprehensive income~~

~~Other comprehensive income~~ ~~consisted of the following:~~

Three Months Ended September 30,
2017 2016
(Dollars in thousands)
Net income $ 57,431
$ 27,437
Derivative loss reclassified into earnings 569
705
Total comprehensive income $ 58,000
$ 28,142

~~Other comprehensive income~~ increased by $29.9 million for the three months ended September 30, 2017, as a result of a $30.0 million increase in net income, partially offset by a decrease of $0.1 million in amortization of deferred net losses reclassified into earnings related to terminated interest rate derivatives.

~~RESULTS OF OPERATIONS~~

~~Comparison of the nine months ended September 30, 2017 to the nine months ended September 30, 2016:~~

Nine Months Ended September 30,
2017 2016
(Dollars in thousands)
Revenues:
Lease rental revenue $ 551,371
$ 537,670
Finance and sales-type lease revenue 16,363
13,026
Amortization of lease premiums, discounts and incentives (8,780 ) (5,419 )
Maintenance revenue 55,738
20,603
Total lease revenue 614,692
565,880
Other revenue 4,526
2,425
Total revenues 619,218
568,305
Operating expenses:
Depreciation 227,446
227,918
Interest, net 185,376
188,490
Selling, general and administrative 55,491
46,883
Impairment of flight equipment 80,430
27,185
Maintenance and other costs 7,846
5,504
Total operating expenses 556,589
495,980
Other income (expense):
Gain on sale of flight equipment 35,926
14,932
Other (3,069 ) (136 )
Total other income 32,857
14,796
Income from continuing operations before income taxes and earnings of unconsolidated equity
method investments
95,486
87,121
Income tax provision 8,536
8,782
Earnings of unconsolidated equity method investments, net of tax 5,804
5,390
Net income $ 92,754
$ 83,729

~~Revenues~~

~~Total revenues~~ ~~increased by $50.9 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.~~

~~Lease rental revenue~~. The increase in lease rental revenue of $13.7 million for the nine months ended September 30, 2017 as compared to the same period in 2016 was primarily the result of increases in revenue of $102.1 million due to the acquisition of 64 aircraft since September 30, 2016. This increase was partially offset by decreases of:

~~$71.8 million due to the sale of 55 aircraft since September 30, 2016; and~~

~~$16.6 million due to lease extensions, amendments, transitions and other changes.~~

~~Finance and sales-type lease revenue.~~ For the nine months ended September 30, 2017, $16.4 million of interest income from finance and sales-type leases was recognized as compared to $13.0 million of interest income from finance and sales-type leases recorded for the same period in 2016 due to the addition of fifteen aircraft, partially offset by the sale of two aircraft, over the last twelve months.

~~Amortization of net lease premiums, discounts and lease incentives.~~

Nine Months Ended September 30,
2017 2016
(Dollars in thousands)
Amortization of lease incentives $ (7,124 ) $ (3,989 )
Amortization of lease premiums (7,935 ) (8,571 )
Amortization of lease discounts 6,279
7,141
Amortization of lease premiums, discounts and incentives $ (8,780 ) $ (5,419 )

As more fully described above under “Revenues,” lease incentives represent our estimated portion of the lessee’s cost for heavy maintenance, overhaul or replacement of certain high-value components which is amortized over the life of the related lease. As we enter into new leases, the amortization of lease incentives generally increases and, conversely, if a related lease terminates, the related unused lease incentive liability will reduce the amortization of lease incentives. The increase in amortization of lease incentives of $3.1 million for the nine months ended September 30, 2017 as compared to the same period in 2016 was primarily attributable to the reversal of lease incentives associated with two freighter aircraft due to changes in estimate and the reclassification of one aircraft from an operating lease to a finance lease.

~~Maintenance revenue.~~ For the nine months ended September 30, 2017, we recorded $55.7 million of maintenance revenue primarily due to the transition of four narrow-body, four wide-body and one freighter aircraft for $50.6 million. For the same period in 2016, we recorded $20.6 million of maintenance revenue from one scheduled lease termination for $6.9 million and maintenance reserves taken into income for three freighter aircraft and one wide-body aircraft totaling $13.2 million.

~~Other revenue.~~ For the nine months ended September 30, 2017, we recorded $4.5 million of other revenue, primarily from fees earned from two lessees in connection with the early terminations of two leases. For the same period in 2016, we recorded $2.4 million of other revenue.

~~Operating expenses~~

~~Total operating expenses~~ ~~increased by $60.6 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.~~

~~Depreciation expense~~ decreased by $0.5 million for the nine months ended September 30, 2017 as compared to the same period in 2016. The decrease is primarily the result of lower depreciation of $44.0 million due to 55 aircraft sold.

~~This decrease was partially offset by increases of:~~

~~$40.2 million due to 64 aircraft acquisitions, and;~~

~~$3.3 million due to changes in asset lives, residual values and other changes.~~

~~Interest, net~~ ~~consisted of the following:~~

Nine Months Ended September 30,
2017 2016
(Dollars in thousands)
Interest on borrowings and other liabilities⁽¹⁾
$ 170,225
$ 166,692
Amortization of interest rate derivatives related to deferred losses 1,725
9,074
Amortization of deferred financing fees and debt discount⁽²⁾
15,860
13,567
Interest expense 187,810
189,333
Less: Interest income (2,089 ) (768 )
Less: Capitalized interest (345 ) (75 )
Interest, net $ 185,376
$ 188,490


~~(1)~~	~~Includes $2.1 million and $1.5 million of loan prepayment fees related to the sale of aircraft during the nine months ended September 30, 2017 and 2016, respectively.~~


~~(2)~~	Includes $4.0 million and $2.0 million in deferred financing fees written off related to the prepayment of debt in connection with the sale of aircraft during the nine months ended September 30, 2017 and 2016, respectively.

Interest, net decreased by $3.1 million as compared to the nine months ended September 30, 2016. The net decrease is primarily a result of lower amortization of deferred losses on terminated interest rate derivatives of $7.3 million and higher interest income of $1.3 million, partially offset by higher interest on borrowings of $3.5 million, primarily due to higher weighted average debt outstanding during the nine months ended September 30, 2017 and higher amortization of deferred financing fees and debt discount of $2.3 million as compared to a year ago.

~~Selling, general and administrative expenses~~ for the nine months ended September 30, 2017 increased $8.6 million over the same period in 2016, primarily as a result of $5.1 million of separation and disability compensation expense related to our former Chief Executive Officer under the terms of his employment and share-based award agreements.

~~Impairment of Aircraft.~~ ~~See “Summary of Impairments and Recoverability Assessment” below for a detailed discussion of impairment charges related to certain aircraft.~~

~~Maintenance and other costs~~ were $7.8 million for the nine months ended September 30, 2017, an increase of $2.3 million over the same period in 2016. The net increase is primarily related to higher maintenance costs of $2.2 million related to terminations and transitions for the nine months ended September 30, 2017 versus the same period in 2016.

~~Other income (expense)~~

~~Gain on sale of flight equipment~~ increased by $21.0 million to $35.9 million for the nine months ended September 30, 2017, as compared to gains of $14.9 million for the same period in 2016. During the nine months ended September 30, 2017, we sold 29 aircraft. During the nine months ended September 30, 2016, we recorded gains totaling $26.7 million that were offset by losses totaling $11.8 million, including a loss of $5.2 million for a wide-body aircraft’s lease extension classified as a sales-type lease.

~~Income tax provision~~

~~Our~~ ~~provision for income taxes~~ for the nine months ended September 30, 2017 and 2016 was $8.5 million and $8.8 million, respectively. Income taxes have been provided based on the applicable tax laws and rates of those countries in which operations are conducted and income is earned, primarily Ireland, Singapore and the United States. The decrease in our income tax provision of approximately $0.2 million for the nine months ended September 30, 2017 as compared to the same period in 2016 was primarily attributable to changes in operating income subject to tax in Ireland, Singapore, the United States and other jurisdictions.

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.

~~Other comprehensive income~~

RESULTS OF OPERATIONS

Comparison of the six months ended June 30, 2019 to the six months ended June 30, 2018:

Nine Months Ended September 30,
2017 2016
(Dollars in thousands)
Net income $ 92,754
$ 83,729
Net change in fair value of derivatives, net of tax expense of $0 for both periods presented —
(1 )
Derivative loss reclassified into earnings 1,725
9,074
Total comprehensive income $ 94,479
$ 92,802



	Six Months Ended June 30,
	2019			2018
	(Dollars in thousands)
Revenues:
Lease rental revenue	$	374,057		$	355,969
Direct financing and sales-type lease revenue	16,764			18,310
Amortization of lease premiums, discounts and incentives	(11,056		)	(6,662		)
Maintenance revenue	42,968			11,991
Total lease revenue	422,733			379,608
Gain on sale of flight equipment	12,348			25,632
Other revenue	2,262			1,716
Total revenues	437,343			406,956
Operating expenses:
Depreciation	174,313			151,183
Interest, net	129,840			114,506
Selling, general and administrative	36,317			36,418
Impairment of flight equipment	7,404			—
Maintenance and other costs	12,617			2,549
Total operating expenses	360,491			304,656

Total other income (expense)	(3,971		)	4,075

Income from continuing operations before income taxes and earnings of unconsolidated equity method investments	72,881			106,375
Income tax provision	9,090			2,288
Earnings of unconsolidated equity method investments, net of tax	2,131			3,663
Net income	$	65,922		$	107,750

~~Other comprehensive income~~

Revenues

Total revenues increased by ~~$1.7~~$30.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019 as acompared to the six months ended June 30, 2018.

Lease rental revenue. The increase in lease rental revenue of $18.1 million for the six months ended June 30, 2019 as compared to the same period in 2018 was primarily the result of increases in revenue of $83.8 million, reflecting the partial period impact of 23 aircraft purchased in 2019, and the full period impact due to the acquisition of 37 aircraft since January 1, 2018. This increase was offset by:

a ~~$9.0~~$47.2 million decrease due to lease extensions, amendments, transitions and other changes ($31.0 million of which is attributable to Avianca Brazil and Jet Airways); and

a $18.5 million decrease due to the sale of thirteen aircraft since January 1, 2018.

Direct financing and sales-type lease revenue. For the six months ended June 30, 2019, $16.8 million of interest income from direct financing and sales-type leases was recognized as compared to $18.3 million for the same period in 2018 due to the sale of two aircraft and the termination of one lease, partially offset by the acquisition of one aircraft and the reclassification of two aircraft from operating to direct financing and sales-type leases since January 1, 2018.

Amortization of lease premiums, discounts and lease incentives consisted of the following:



	Six Months Ended June 30,
	2019			2018
	(Dollars in thousands)
Amortization of lease incentives	$	(5,591	)	$	(5,606	)
Amortization of lease premiums	(8,298		)	(5,052		)
Amortization of lease discounts	2,833			3,996

Amortization of lease premiums, discounts and incentives	$	(11,056	)	$	(6,662	)

The increase in amortization of lease premiums of $3.2 million for the six months ended June 30, 2019, as compared to the same period in 2018, was due to a net ~~income,~~increase in amortization resulting from net aircraft acquisitions.

Maintenance revenue. For the six months ended June 30, 2019, we recorded $43.0 million of maintenance revenue, primarily due to the transition of 21 narrow-body aircraft and three wide-body aircraft, including cash maintenance revenue received for ten narrow-body aircraft from Avianca Brazil and $17.6 million related to the early lease terminations with Jet Airways. See “Summary of Recoverability Assessment and Other Impairments” below. For the same period in 2018, we recorded $12.0 million of maintenance revenue primarily due to the transition of one freighter aircraft.

Gain on sale of flight equipment decreased by $13.3 million to $12.3 million for the six months ended June 30, 2019, as compared to gains of $25.6 million for the same period in 2018. During the six months ended June 30, 2019, we sold four aircraft, as compared to the sale of eight aircraft during the same period in 2018. We also recognized gains totaling $3.7 million resulting from the transition of two aircraft from operating to net investment in direct financing and sales-type leases during the six months ended June 30, 2019.

Operating expenses

Total operating expenses increased by $55.8 million for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.

Depreciation expense increased by $23.1 million for the six months ended June 30, 2019 as compared to the same period in 2018. The increase is primarily the result of:

$31.1 million due to the effect of 60 aircraft acquired since January 1, 2018; and

$1.7 million due to changes in asset lives, residual values and other changes.

These increases were partially offset by a decrease of ~~$7.3~~$9.7 million in ~~amortization~~depreciation due to the sale of ~~deferred~~thirteen aircraft.

Interest, net ~~losses reclassified into earnings~~ consisted of the following:



	Six Months Ended June 30,
	2019			2018
	(Dollars in thousands)
Interest on borrowings and other liabilities	$	123,918		$	107,957
Amortization of deferred losses related to interest rate derivatives	184			595
Amortization of deferred financing fees and debt discount	6,958			7,042
Interest expense	131,060			115,594
Less: Interest income	(1,220		)	(990		)
Less: Capitalized interest	—			(98		)
Interest, net	$	129,840		$	114,506

Interest, net increased by $15.3 million as compared to the six months ended June 30, 2018. This increase was the result of higher weighted average debt outstanding.

Selling, general and administrative expenses for the six months ended June 30, 2019 were flat as compared to the same period in 2018.

Impairment of Flight Equipment. See “Summary of Recoverability Assessment and Other Impairments” below for a detailed discussion of impairment charges related to ~~terminated~~certain aircraft.

Maintenance and other costs were $12.6 million for the six months ended June 30, 2019, an increase of $10.1 million compared to the same period in 2018. The net increase is primarily attributable to scheduled and eighteen unscheduled transitions due to early lease terminations related to Avianca Brazil and Jet Airways for the six months ended June 30, 2019 versus the same period in 2018 and higher than projected lessor contributions towards the cost of maintenance events for aircraft acquired with attached leases of $3.0 million.

Other income (expense)

Total other income (expense) decreased by $8.0 million for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The net decrease in other income was attributable to unfavorable mark-to-market adjustments on our interest rate ~~derivatives.~~caps.

Income tax provision

Our income tax provision for the six months ended June 30, 2019 and 2018 was $9.1 million and $2.3 million, respectively. Income taxes have been provided based on the applicable tax laws and rates of those countries in which operations are conducted and income is earned, primarily Ireland and the United States. The increase in our income tax provision of $6.8 million for the six months ended June 30, 2019, as compared to the same period in 2018, was primarily attributable to changes in operating income subject to tax in Ireland, the United States and other jurisdictions, and the recording of a $2.8 million non-cash tax expense related to a fair value adjustment on an intercompany asset transfer, which was treated as a discrete item. Pre-tax earnings for the six months ended June 30, 2018 included the recording of a $2.8 million tax benefit related to the Singapore rate reduction from 10% to 8%, which was treated as a discrete item. Excluding these discrete items, the income tax provision for the six months ended June 30, 2019 and 2018 would have been $6.2 million and $5.1 million, respectively.

Our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are primarily non-U.S. corporations. These subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius and the U.S. are subject to tax in those respective jurisdictions.

We have a U.S. based subsidiary which provides management services to our 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.

Summary of Recoverability Assessment and Other Impairments

Transactional Impairments

~~During~~On April 10, 2019, the Company early terminated the leases for seven Boeing 737NG aircraft on lease to Jet Airways (India) Limited due to lessee default. As a result of these lease terminations, the Company recognized net maintenance revenue of $17.6 million and impairment charges of $7.4 million in the second quarter of ~~2017, we entered into agreements~~2019 related to sell two Boeing 747-400 production freighter aircraft at the end of their respective leases and one older Boeing 747-400 converted freighter aircraft to its lessee, resulting in impairment charges totaling $79.2 million, partially offset by maintenance revenue of $13.5 million. During the third quarter of 2017, we sold one production freighter and one converted freighterthese aircraft. ~~We expect to sell one production freighter aircraft in the first quarter of 2018.~~

Annual Recoverability Assessment

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.

Aircraft Monitoring List

At ~~September~~June 30, ~~2017, we considered one Boeing 747-400 production freighter model and five Airbus A330 passenger~~2019, no aircraft ~~with a total net book value of $407.3 million, or 6.8%, to be~~were on our monitoring list. We monitor our fleet for aircraft that are more susceptible to failing our recoverability assessments within one year due to their sensitivity to changes in contractual cash flows, future cash flow estimates and aircraft residual or scrap values.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

See Note 1 - “Summary of Significant Accounting Policies –Organization and Basis of Presentation” in the Notes to Unaudited Consolidated Financial Statements above.

RECENTLY UNADOPTED ACCOUNTING PRONOUNCEMENTS

See Note 1 - “Summary of Significant Accounting Policies – Recent Accounting Pronouncements” in the Notes to Unaudited Consolidated Financial Statements above.

LIQUIDITY AND CAPITAL RESOURCES

Our business is very capital intensive, requiring significant investments in order to expand our fleet and to maintain and improve our existing portfolio. Our operations generate a significant amount of cash, primarily from lease rentals and maintenance collections. We have also met our liquidity and capital resource needs by utilizing several sources over time, including:

unsecured indebtedness, including our current unsecured revolving credit facilities, term loan and senior notes;

various forms of borrowing secured by our aircraft, including bank term facilities, limited recourse securitization financings, and ECA-backed financings for new aircraft acquisitions;

~~unsecured indebtedness, including our current unsecured revolving credit facilities, term loan and senior notes;~~

asset sales; and

sales of common shares.

Going forward, we expect to continue to seek liquidity from these sources and other sources, subject to pricing and conditions we consider satisfactory.

During the first ~~nine~~six months of ~~2017,~~2019, we met our liquidity and capital resource needs with ~~$393.5~~$245.6 million of cash flow from operations, ~~$500.0 million~~$1.84 billion in gross proceeds from the issuance of our Senior Notes due ~~2024~~2026, bank debt and ~~$765.0~~our revolving credit facilities and $56.9 million of cash from aircraft sales.

As of ~~September~~June 30, ~~2017,~~2019, the weighted-average maturity of our secured and unsecured debt financings was ~~3.9~~3.6 years and we ~~are~~were in compliance with all applicable covenants.

We believe that cash on hand, payments received from lessees and other funds generated from operations, secured borrowings for aircraft, borrowings under our revolving credit facilities and other borrowings and proceeds from future aircraft sales will be sufficient to satisfy our liquidity and capital resource needs over the next twelve months. Our liquidity and capital resource needs include payments due under our aircraft purchase obligations, required principal and interest payments under our long-term debt facilities, expected capital expenditures, lessee maintenance payment reimbursements and lease incentive payments over the next twelve months.

Cash Flows

Nine Months Ended September 30,
2017 2016
(Dollars in thousands)
Net cash flow provided by operating activities $ 393,458
$ 367,413
Net cash flow provided by (used in) investing activities 173,821
(395,533 )
Net cash flow (used in) provided by financing activities (392,911 ) 484,326



	Six Months Ended June 30,
	2019			2018
	(Dollars in thousands)
Net cash flow provided by operating activities	$	245,612		$	252,970
Net cash flow used in investing activities	(591,055		)	(204,585		)
Net cash flow provided by (used in) financing activities	692,714			(119,002		)

Operating Activities:

Cash flow provided by operations was $~~393.5~~245.6 million and $~~367.4~~253.0 million for the ~~nine~~six months ended ~~September~~ June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The ~~increase~~decrease in cash flow provided by operations of ~~approximately $26.0~~$7.4 million for the ~~nine~~six months ended~~September~~June 30, ~~2017~~2019 versus the same period in ~~2016~~2018 was primarily a result ~~of:~~of a $13.4 million increase in cash paid for interest and a $10.1 million increase in cash paid for maintenance.

These outflows were offset by:

a ~~$30.7~~$6.8 million increase in cash from lease rentals and direct financing and sales-type leases;

a $5.4 million decrease in cash paid for taxes; and

a $3.0 million increase in cash received from maintenance ~~revenue;~~

~~a $12.0 million increase in cash from lease rentals, net of finance and sales-type leases; and~~

~~a $9.3 million decrease in cash paid for taxes.~~

~~These inflows were offset by a $10.9 million decrease in cash from working capital and a $14.8 million increase in cash paid for interest.~~revenue.

Investing Activities:

Cash flow ~~provided by~~used in investing activities was ~~$173.8~~$591.1 million and $204.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017 as compared to~~2019 and 2018, respectively. The increase in cash flow used in investing activities of ~~$395.5~~$386.5 million for the ~~nine~~six months ended~~September~~June 30, ~~2016. The net increase in cash flow provided by investing activities of $569.4 million for the~~ ~~nine months endedSeptember 30, 2017~~2019 versus the same period in ~~2016~~2018 was primarily a result of:

a ~~$280.1~~$279.0 million net ~~decrease~~increase in the acquisition and improvement of flight equipment and net investments in ~~finance~~direct financing and sales-type leases; and

a ~~$276.2~~$121.3 million ~~increase~~decrease in aircraft proceeds from the sale of flight ~~equipment; and~~equipment.

•These outflows were offset by a ~~$12.7~~$22.0 million decrease in ~~unconsolidated equity method investments.~~aircraft purchase deposits and progress payments, net of returned deposits.

Financing Activities:

Cash flow provided by financing activities was $692.7 million for the six months ended June 30, 2019 as compared to cash flow used in financing activities ~~was $392.9~~of $119.0 million for the ~~nine~~six months ended ~~September~~ June 30, ~~2017 as compared to~~2018. The net increase in cash flow provided by financing activities of ~~$484.3~~$811.7 million for the ~~nine~~six months ended~~September~~ June 30, ~~2016. The net increase in cash flow used in financing activities of $877.2 million for the nine months ended September 30, 2017~~2019 versus the same period in ~~2016~~2018 was primarily a result ~~of:~~

of a ~~$499.4 million decrease~~$1.8 billion increase in proceeds from secured and unsecured ~~financings;~~financings.

These inflows were offset by a ~~$363.3~~$977.0 million increase in ~~securitization~~secured and ~~term~~unsecured debt financing ~~repayments;~~repayments and

a ~~$52.4~~$42.2 million ~~increase~~decrease in net maintenance payments and security deposits ~~returned, net of deposits~~ received.

~~These outflows were partially offset by a $31.7 million decrease in shares repurchased and an $8.7 million decrease in deferred financing costs.~~

Debt Obligations

For complete information on our debt obligations, please refer to Note 7 - “Secured and Unsecured Debt Financings” in the Notes to Unaudited Consolidated Financial Statements above.

Contractual Obligations

Our contractual obligations consist of principal and interest payments on debt, ~~payments on interest rate derivatives,~~ other aircraft acquisition agreements and rent payments related to our office leases. Total contractual obligations increased to ~~$6.86~~$7.64 billion at ~~September~~June 30, ~~2017~~2019 from ~~$6.50~~$6.95 billion at December 31, ~~2016~~2018, due primarily to an increase in aircraft purchase obligations, ~~for aircraft to be acquired,~~ partially offset by ~~the amortization of our other financings.~~debt amortization.

The following table presents our actual contractual obligations and their payment due dates as of ~~September~~June 30, ~~2017~~2019:


	Payments Due by Period as of September 30, 2017										Payments Due by Period as of June 30, 2019
Contractual Obligations	Total		1 year or less		2-3 years		4-5 years		More than 5 years		Total		1 year or less		2-3 years		4-5 years		More than 5 years
	(Dollars in thousands)										(Dollars in thousands)
Principal payments:
Senior Notes due 2018 - 2024	$	3,200,000	$	—	$	1,200,000	$	1,000,000	$	1,000,000
Unsecured Term Loan	120,000		—		120,000		—		—
Senior Notes due 2019 - 2026											$	4,100,000	$	800,000	$	1,000,000	$	1,650,000	$	650,000
Unsecured Term Loans											215,000		—		60,000		155,000		—
Revolving Credit Facilities	—		—		—		—		—		—		—		—		—		—
ECA Financings	236,879		38,071		80,321		80,475		38,012		169,350		40,509		81,655		43,132		4,054
Bank Financings	652,138		76,123		134,734		125,244		316,037		1,059,092		90,290		186,966		344,141		437,695
Total principal payments	4,209,017		114,194		1,535,055		1,205,719		1,354,049		5,543,442		930,799		1,328,621		2,192,273		1,091,749

Interest payments on debt obligations⁽¹⁾	827,298		211,809		356,308		178,026		81,155		927,011		252,520		384,749		225,165		64,577
Office leases⁽²⁾	21,335		1,259		4,971		4,901		10,204		16,455		2,264		3,806		3,398		6,987
Purchase obligations⁽³⁾	1,803,810		896,818		765,349		141,643		—		1,158,069		260,343		897,726		—		—

Total	$	6,861,460	$	1,224,080	$	2,661,683	$	1,530,289	$	1,445,408	$	7,644,977	$	1,445,926	$	2,614,902	$	2,420,836	$	1,163,313


(1)	Future interest payments on variable rate, LIBOR-based debt obligations are estimated using the interest rate in effect at ~~September~~June 30, ~~2017.~~2019.


(2)	Represents contractual payment obligations for our office leases in Stamford, Connecticut; Dublin, Ireland and Singapore.


(3)	At ~~September~~June 30, ~~2017,~~2019, we had commitments to acquire 6432 aircraft for ~~$1.80~~$1.16 billion, including 25 new E-Jet E2 aircraft from Embraer S.A. These amounts include estimates for pre-delivery deposits, contractual price escalation and other adjustments. As of ~~October 31, 2017,~~August 2, 2019, we have commitments to acquire 5539 aircraft for ~~$1.68~~$1.33 billion.

Capital Expenditures

From time to time, we make capital expenditures to maintain or improve our aircraft. These expenditures include the cost of major overhauls necessary to place an aircraft in service and modifications made at the request of lessees. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, we incurred a total of ~~$24.4~~$17.6 million and ~~$27.0~~$3.4 million, respectively, of capital expenditures (including lease incentives) related to the ~~acquisition and~~ improvement of aircraft.

As of ~~September~~June 30, ~~2017,~~2019, the weighted average age by net book value of our aircraft was approximately ~~8.7~~9.5 years. In general, the costs of operating an aircraft, including maintenance expenditures, increase with the age of the aircraft. Our lease agreements call for the lessee to be primarily responsible for maintaining the aircraft. We may incur additional maintenance and modification costs in the future in the event we are required to remarket an aircraft or a lessee fails to meet its maintenance obligations under the lease agreement. These maintenance reserves are paid by the lessee to provide for future maintenance events. Provided a lessee performs scheduled maintenance of the aircraft, we are required to reimburse the lessee for scheduled maintenance payments. In certain cases, we are also required to make lessor contributions, in excess of amounts a lessee may have paid, towards the costs of maintenance events performed by or on behalf of the lessee.

Actual maintenance payments to us by lessees in the future may be less than projected as a result of a number of factors, including defaults by the lessees. Maintenance reserves may not cover the entire amount of actual maintenance expenses

incurred and, where these expenses are not otherwise covered by the lessees, there can be no assurance that our operational cash flow and maintenance reserves will be sufficient to fund maintenance requirements, particularly as our aircraft age. See Item 1A. “Risk Factors - Risks Related to Our Business - Risks related to our leases - If lessees are unable to fund their maintenance obligations on our aircraft, we may incur increased costs at the conclusion of the applicable lease” in our ~~2016~~2018 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We entered into two joint venture arrangements in order to help expand our base of new business opportunities. ~~None~~Neither of these joint ventures qualifies for consolidated accounting treatment. The assets and liabilities of these entities are not included in our Consolidated Balance Sheets and we record our net investment under the equity method of accounting. See Note 5 - “Unconsolidated Equity Method Investments” in the Notes to Unaudited Consolidated Financial Statements above.

We hold a 30% equity interest in our Lancaster joint venture and a 25% equity interest in our IBJ Air joint venture. At ~~September~~June 30, ~~2017,~~2019, the net book value of our two joint ventures’ ~~thirteen~~fifteen aircraft was ~~approximately $661~~$678.5 million. As of June 30, 2019, there is an executed sales agreement between the joint venture with Teachers and a single buyer for aircraft held by the joint venture. All sales are anticipated to be completed by the end of 2019.

In March of 2019, we sold two aircraft to IBJ Air. This transaction was approved by our Audit Committee as an arm’s length transaction under our related party policy.

Foreign Currency Risk and Foreign Operations

At ~~September~~June 30, ~~2017~~2019, all of our leases are payable to us in U.S. dollars. However, we incur Euro and Singapore dollar-denominated expenses in connection with our subsidiaries in Ireland and Singapore. For the ~~nine~~six months ended~~September~~June 30, ~~2017~~2019, expenses, such as payroll and office costs, denominated in currencies other than the U.S. dollar aggregated approximately ~~$14.2~~$8.1 million in U.S. dollar equivalents and represented approximately ~~26%~~22% of total selling, general and administrative expenses. Our international operations are a significant component of our business strategy and permit us to more effectively source new aircraft, service the aircraft we own and maintain contact with our lessees. Therefore, our international operations and our exposure to foreign currency risk will likely increase over time. Although we have not yet entered into foreign currency hedges because our exposure to date has not been significant, if our foreign currency exposure increases, we may enter into hedging transactions in the future to mitigate this risk. For the ~~nine~~six months ended ~~September~~ June 30, ~~2017~~2019 and ~~2016,~~2018, we incurred insignificant net gains and losses on foreign currency transactions.

~~Hedging~~

~~For complete information on our derivative instruments, please refer to Note 16 - “Accumulated Other Comprehensive Loss” in the Notes to Unaudited Consolidated Financial Statements above.~~

Management’s Use of EBITDA and Adjusted EBITDA

We define EBITDA as income (loss) from continuing operations before income taxes, interest expense, and depreciation and amortization. We use EBITDA to assess our consolidated financial and operating performance, and we believe this non-U.S. GAAP measure is helpful in identifying trends in our performance.

This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals, as well as achieving optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed.

EBITDA provides us with a measure of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure (primarily interest charges on our outstanding debt) and asset base (primarily depreciation and amortization) from our operating results. Accordingly, this metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure, or expenses, of the organization. EBITDA is one of the metrics used by senior management and the Board of Directors to review the consolidated financial performance of our business.

We define Adjusted EBITDA as EBITDA (as defined above) further adjusted to give effect to adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes. Adjusted EBITDA is a material component of these covenants.

The table below shows the reconciliation of net income to EBITDA and Adjusted EBITDA for the three and ~~nine~~six months ended ~~September~~ June 30, ~~2017~~2019 and ~~2016:~~2018:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016		2017		2016		2019		2018			2019		2018
	(Dollars in thousands)								(Dollars in thousands)
Net income	$	57,431	$	27,437	$	92,754	$	83,729	$	31,112	$	50,203		$	65,922	$	107,750
Depreciation	70,018		76,201		227,446		227,918		89,578		76,181			174,313		151,183
Amortization of lease premiums, discounts and incentives	2,388		521		8,780		5,419		5,345		3,534			11,056		6,662
Interest, net	60,636		61,797		185,376		188,490		66,377		57,398			129,840		114,506
Income tax provision	6,195		2,458		8,536		8,782		5,992		3,132			9,090		2,288
EBITDA	196,668		168,414		522,892		514,338		198,404		190,448			390,221		382,389
Adjustments:
Impairment of flight equipment	—		10,462		80,430		27,185		7,404		—			7,404		—
Equity share of joint venture impairment									—		—			2,724		—
Non-cash share-based payment expense	2,506		2,059		10,636		5,796		3,177		3,076			5,903		5,454
Loss on mark-to-market of interest rate derivative contracts	361		210		3,073		141
Loss (gain) on mark-to-market of interest rate derivative contracts									1,915		(901		)	3,995		(4,075		)

Adjusted EBITDA	$	199,535	$	181,145	$	617,031	$	547,460	$	210,900	$	192,623		$	410,247	$	383,768

Management’s Use of Adjusted Net Income (“ANI”)

Management believes that ANI, when viewed in conjunction with the Company’s results under U.S. GAAP and the below reconciliation, provides useful information about operating and period-over-period performance and additional information that is useful for evaluating the underlying operating performance of our business without regard to periodic reporting elements related to interest rate derivative accounting, changes related to refinancing activity and non-cash share-based payment expense.

The table below shows the reconciliation of net income to ANI for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~2018:

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(Dollars in thousands)
Net income $ 57,431
$ 27,437
$ 92,754
$ 83,729
Loan termination fee⁽¹⁾
1,070
—
2,058
1,509
Loss on mark-to-market of interest rate derivative contracts⁽²⁾
361
210
3,073
141
Write-off of deferred financing fees⁽¹⁾
3,019
—
4,005
1,972
Non-cash share-based payment expense⁽³⁾
2,506
2,059
10,636
5,796
Hedge loss amortization charges ⁽¹⁾
—
—
—
4,855
Adjusted net income $ 64,387
$ 29,706
$ 112,526
$ 98,002



	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
	(Dollars in thousands)
Net income	$	31,112	$	50,203		$	65,922	$	107,750
Loss (gain) on mark-to-market of interest rate derivative contracts⁽¹⁾	1,915		(901		)	3,995		(4,075		)
Non-cash share-based payment expense⁽²⁾	3,177		3,076			5,903		5,454

Adjusted net income	$	36,204	$	52,378		$	75,820	$	109,129

(1) ~~Included in Interest, net.~~

~~(2)~~ Included in Other income (expense).

~~(3)~~(2) Included in Selling, general and administrative expenses.


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended June 30,		Six Months Ended June 30,
Weighted-average shares:	2017	2016	2017	2016	2019	2018	2019	2018
Common shares outstanding	78,237,199	77,989,933	78,197,091	78,230,011	74,650,357	77,910,513	74,676,926	78,137,290
Restricted common shares	569,617	680,249	569,453	646,299	524,331	498,433	479,679	464,983
Total weighted-average shares	78,806,816	78,670,182	78,766,544	78,876,310	75,174,688	78,408,946	75,156,605	78,602,273


	Three Months Ended September 30,				��	Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
Percentage of weighted-average shares:	2017		2016			2017		2016		2019		2018		2019		2018
Common shares outstanding	99.28	%	99.14	%		99.28	%	99.18	%	99.30	%	99.36	%	99.36	%	99.41	%
Restricted common shares⁽¹⁾	0.72	%	0.86	%		0.72	%	0.82	%	0.70	%	0.64	%	0.64	%	0.59	%
Total percentage of weighted-average shares	100.00	%	100.00	%		100.00	%	100.00	%	100.00	%	100.00	%	100.00	%	100.00	%


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended June 30,		Six Months Ended June 30,
	2017	2016	2017	2016	2019	2018	2019	2018
Weighted-average common shares outstanding – Basic	78,237,199	77,989,933	78,197,091	78,230,011	74,650,357	77,910,513	74,676,926	78,137,290
Effect of dilutive shares⁽²⁾	137,810	32,235	169,053	35,804	791,189	337,716	680,507	282,868
Weighted average common shares outstanding – Diluted	78,375,009	78,022,168	78,366,144	78,265,815	75,441,546	78,248,229	75,357,433	78,420,158


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
	(Dollars in thousands, except per share amounts)												(Dollars in thousands, except per share amounts)
Adjusted net income allocation:
Adjusted net income	$	64,387		$	29,706		$	112,526		$	98,002		$	36,204		$	52,378		$	75,820		$	109,129
Less: Distributed and undistributed earnings allocated to restricted common shares⁽²⁾	(465		)	(257		)	(814		)	(803		)	(253		)	(333		)	(484		)	(646		)
Adjusted net income allocable to common shares – Basic and Diluted	$	63,922		$	29,449		$	111,712		$	97,199		$	35,951		$	52,045		$	75,336		$	108,483

Adjusted net income per common share – Basic and Diluted	$	0.82		$	0.38		$	1.43		$	1.24
Adjusted net income per common share – Basic													$	0.48		$	0.67		$	1.01		$	1.39

Adjusted net income per common share – Diluted													$	0.48		$	0.67		$	1.00		$	1.38

(1)


(2)	For all periods presented, dilutive shares ~~represented~~represent contingently issuable shares.

Limitations of EBITDA, Adjusted EBITDA and ANI

An investor or potential investor may find EBITDA, Adjusted EBITDA and ANI important measures in evaluating our performance, results of operations and financial position. We use these non-U.S. GAAP measures to supplement our U.S. GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

EBITDA, Adjusted EBITDA and ANI have limitations as analytical tools and should not be viewed in isolation or as substitutes for U.S. GAAP measures of earnings (loss). Material limitations in making the adjustments to our earnings (loss) to calculate EBITDA, Adjusted EBITDA and ANI, and using these non-U.S. GAAP measures as compared to U.S. GAAP net income (loss), income (loss) from continuing operations and cash flows provided by or used in operations, include:

depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our aircraft, which affects the aircraft’s availability for use and may be indicative of future needs for capital expenditures;

the cash portion of income tax (benefit) provision generally represents charges (gains), which may significantly affect our financial results;

elements of our interest rate derivative accounting may be used to evaluate the effectiveness of our hedging policy;

hedge loss amortization charges; and

adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes.

EBITDA, Adjusted EBITDA and ANI are not alternatives to net income (loss), income (loss) from operations or cash flows provided by or used in operations as calculated and presented in accordance with U.S. GAAP. You should not rely on these non-U.S. GAAP measures as a substitute for any such U.S. GAAP financial measure. We strongly urge you to review the reconciliations to U.S. GAAP net income (loss), along with our consolidated financial statements included elsewhere in this report. We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because EBITDA, Adjusted EBITDA and ANI are not measures of financial performance under U.S. GAAP and

are susceptible to varying calculations, EBITDA, Adjusted EBITDA and ANI as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. These risks are highly sensitive to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates. Our primary interest rate exposures relate to our lease agreements, floating rate debt obligations and interest rate derivatives. Rent payments under our aircraft lease agreements typically do not vary during the term of the lease according to changes in interest rates. However, our borrowing agreements generally require payments based on a variable interest rate index, such as LIBOR. Therefore, to the extent our borrowing costs are not fixed, increases in interest rates may reduce our net income by increasing the cost of our debt without any corresponding increase in rents or cash flow from our securities.

Changes in interest rates may also impact our net book value as our interest rate derivatives are periodically marked-to-market through shareholders’ equity. Generally, we are exposed to loss on our fixed pay interest rate derivatives to the extent interest rates decrease below their contractual fixed rate.

The relationship between spreads on derivative instruments may vary from time to time, resulting in a net aggregate book value increase or decrease. Changes in the general level of interest rates can also affect our ability to acquire new investments and our ability to realize gains from the settlement of such assets.

Sensitivity Analysis

The following discussion about the potential effects of changes in interest rates is based on a sensitivity analysis, which models the effects of hypothetical interest rate shifts on our financial condition and results of operations. Although we believe a sensitivity analysis provides the most meaningful analysis permitted by the rules and regulations of the SEC, it is constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by the inability to include the extraordinarily complex market reactions that normally would arise from the market shifts modeled. Although the following results of a sensitivity analysis for changes in interest rates may have some limited use as a benchmark, they should not be viewed as a forecast. This forward-looking disclosure also is selective in nature and addresses only the potential interest expense impacts on our financial instruments and, in particular, does not address the mark-to-market impact on our interest rate derivatives. It also does not include a variety of other potential factors that could affect our business as a result of changes in interest rates.

A hypothetical 100-basis point increase/decrease in our variable interest rates would increase/decrease the minimum contracted rentals on our portfolio as of ~~September~~June 30, ~~2017~~2019 by ~~$2.3~~$4.2 million and ~~$2.3~~$4.2 million, respectively, over the next twelve months. As of ~~September~~June 30, ~~2017,~~2019, a hypothetical 100-basis point increase/decrease in our variable interest rate on our borrowings would result in an interest expense increase/decrease of ~~$3.9~~$4.0 million and $5.3 million, respectively, net of amounts received from our interest rate derivatives, over the next twelve months. In September 2016, we purchased an interest rate cap ~~for $2.3 million~~ to hedge ~~approximately 70%~~a portion of our floating rate interest exposure. The interest rate cap is set at 2% and has a current notional balance of ~~$405.0~~$260.0 million and reduces over time to $215.0 million. The cap matures in September 2021.


~~ITEM 4.~~	~~CONTROLS AND PROCEDURES~~

ITEM 4. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by

a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure. An evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures as of ~~September~~June 30, ~~2017~~2019. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of ~~September~~June 30, ~~2017~~2019.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f), that occurred during the quarter ended ~~September~~June 30, ~~2017~~2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. — OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

The Company is not a party to any material legal or adverse regulatory proceedings.

ITEM 1A. RISK FACTORS

~~There~~Except for the risk factor stated below, there have been no material changes to the disclosure related to the risk factors described in our Annual Report on Form 10-K filed with the SEC for the year ended December 31, ~~2016.~~2018.

Risks Related to the Boeing 737 MAX Groundings

As a result of two fatal accidents of Boeing 737 MAX aircraft within five months of each other, airlines and regulators grounded the worldwide fleet of Boeing 737 MAX aircraft in March of 2019. In addition to the grounding of delivered Boeing 737 MAX aircraft, Boeing also continues to produce 737 MAX aircraft which remain undelivered. The duration of the Boeing 737 MAX grounding and the timing of its eventual return to service are uncertain and it is also uncertain at what rate Boeing will continue to produce these aircraft if the grounding persists. We do not own, nor do we have commitments to purchase, any Boeing 737 MAX aircraft. Nevertheless, the uncertainty surrounding the duration of the grounding, the rate of Boeing’s continued production and the timing and implications of any return to service could negatively impact our lessees’ financial condition, lease rates, demand for other aircraft types and the value of the aircraft in our fleet. A similar type of grounding for other aircraft types that we have in our fleet, or have commitments to purchase, could also negatively affect our financial results.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

~~In February 2016,~~On May 21, 2019, our Board of Directors ~~authorized~~increased the authorization to repurchase ~~of $100.0 million of~~ the Company’s common ~~shares.~~shares to $100.0 million from the $76.0 million that was remaining under the previous authorization. During the ~~third~~second quarter of ~~2017~~,2019, we purchased our common shares as follows:

Period
Total
Number
of Shares
Purchased

Average
Price
Paid
per Share

Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs⁽¹⁾

Maximum Number
(or Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans or
Programs ⁽¹⁾
(Dollars in thousands, except per share amounts)
July 1 through July 31 —
$ —
—
$ 95,888
August 1 through August 31 104,594
0.01
—
95,888
September 1 through September 30 —
—
—
95,888
Total 104,594
$ 0.01
—
$ 95,888



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs ⁽¹⁾
	(Dollars in thousands, except per share amounts)
April 1 through April 30	—	$	—	—	$	76,019
May 1 through May 31	—	—		—	100,000
June 1 through June 30	129,524	20.39		128,824	97,359

Total	129,524	$	20.39	128,824	$	97,359

(1)

We repurchased an additional 32,317 common shares at a total cost of $0.7 million, including commissions, during July 2019. Under our current repurchase program, we have repurchased an aggregate of ~~217,574~~161,141 common shares at an aggregate cost of ~~$4.1~~$3.3 million, including commissions. The remaining dollar value of common shares that may be repurchased under the program is $96.7 million.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.	OTHER INFORMATION

None.


ITEM 6.	EXHIBITS



Exhibit No.		Description of Exhibit

3.1		Memorandum of Association (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 2) (No. 333-134669) filed on July 25, 2006).

3.2		Amended Bye-laws (incorporated by reference to Exhibit 3.2 to the Company’s ~~Registration Statement~~Quarterly Report on Form ~~S-3 (No. 333-182242)~~10-Q filed on ~~June 20, 2012)~~May 2, 2019).

4.1		Specimen Share Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 2) (No. 333-134669) filed on July 25, 2006).

4.2		Indenture, dated as of April 4, 2012, by and between Aircastle Limited and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 5, 2012).

4.3		Indenture, dated as of November 30, 2012, by and between Aircastle Limited and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 30, 2012).

4.4		Amended and Restated Shareholder Agreement, dated as of February 18, 2015, by and between Aircastle Limited and Marubeni Corporation (incorporated by reference to Exhibit 4.8 to the Company’s Quarterly Report on Form 10-Q filed on May 6, 2015).

4.5		Amendment No. 1 to the Amended and Restated Shareholder Agreement, dated as of September 23, 2016, by and among Aircastle Limited, Marubeni Corporation, and Marubeni Aviation Holding Coöperatief U.A. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on September 26, 2016).

4.6		Indenture, dated as of December 5, 2013, by and between Aircastle Limited and Wells Fargo Bank, National Association, as trustee Citigroup Global Markets, Inc., Goldman, Sachs & Co., J.P. Morgan Securities LLC and RBC Capital Markets, LLC (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 6, 2013).

4.7		First Supplemental Indenture, dated as of December 5, 2013, by and between Aircastle Limited and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 6, 2013).

~~4.8~~		Second Supplemental Indenture, dated as of March 26, 2014, by and between Aircastle Limited and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 26, 2014).

~~4.9~~4.8		Third Supplemental Indenture, dated as of January 15, 2015, by and between Aircastle Limited and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 15, 2015).

~~4.10~~4.9		Fourth Supplemental Indenture, dated as of March 24, 2016, by and between Aircastle Limited and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 24, 2016).

~~4.11~~4.10		Fifth Supplemental Indenture, dated as of March 20, 2017, by and between Aircastle Limited and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 20, 2017).

~~10.1~~4.11		~~Separation Agreement,~~Sixth Supplemental Indenture, dated ~~June 30, 2017,~~as of September 25, 2018, between Aircastle ~~Advisor LLC~~Limited and ~~Ron Wainshal~~Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit ~~10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2017). #~~

~~10.2~~		~~Aircastle Limited Amended and Restated 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 25, 2017).~~

~~10.3~~		~~Form of Employment Agreement (incorporated by reference to Exhibit 10.1~~4.1 to the Company’s Current Report on Form 8-K filed on September ~~8, 2017)~~25, 2018). #

~~10.4~~		~~Amendment No. 4 to Purchase Agreement COM0270-15, dated as of August 11, 2017, by and between Aircastle Holding Corporation and Embraer S.A. *Ø~~

~~10.5~~4.12		~~Amendment No. 2 to Letter Agreement COM0271-15 in Purchase Agreement COM0270-15,~~Seventh Supplemental Indenture, dated as of ~~August 11, 2017, by and~~June 13, 2018, between Aircastle ~~Holding Corporation~~Limited and ~~Embraer S.A. *Ø~~Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 13, 2019).


31.1		Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002. *

31.2		Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002. *

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1		Owned Aircraft Portfolio at June 30, 2019. *



Exhibit No.		Description of Exhibit

~~32.1~~		~~Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~ *

~~32.2~~		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

~~99.1~~		Owned Aircraft Portfolio at September 30, 2017. *

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2017,~~2019, formatted in ~~XBRL (eXtensible~~iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016;~~2018; (ii) Consolidated Statements of Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016;~~2018; (iii) Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016;~~2018; (iv) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016;~~2018; (v) Consolidated Statements of Changes in Shareholders’ Equity for the three and ~~(v)~~six months ended June 30, 2019 and 2018; and (vi) Notes to Unaudited Consolidated Financial Statements. *

104		Cover Page Interactive Data file. *

~~# Management contract or compensatory plan or arrangement.~~

* Filed herewith.

~~Ø Portions of this exhibit have been omitted pursuant to a request for confidential treatment.~~

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: ~~November 2, 2017~~August 6, 2019



	AIRCASTLE LIMITED
	(Registrant)
	By:	/s/ ~~Jose Maronilla, Jr.~~James C. Connelly
		~~Jose Maronilla, Jr.~~James C. Connelly
		Chief Accounting Officer and Authorized Officer

5052



			Fair Value Measurements at September 30, 2017 Using Fair Value Hierarchy
	Fair Value as of September 30, 2017		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	$	662,649	$	662,649	$	—	$	—	Market
Restricted cash and cash equivalents	20,536		20,536		—		—		Market
Derivative assets	2,663		—		2,663		—		Market
Total	$	685,848	$	683,185	$	2,663	$	—



Year Ending December 31,	Amount
Remainder of 2017	$	163,587
2018	630,237
2019	532,026
2020	424,140
2021	350,093
Thereafter	830,674
Total	$	2,930,757



	Amount
Total lease payments to be received	$	297,061
Less: Unearned income	(153,253		)
Estimated residual values of leased flight equipment (unguaranteed)	344,600
Net investment in finance and sales-type leases	$	488,408



	September 30, 2017		December 31, 2016
Accounts payable and accrued expenses	$	33,499	$	24,337
Deferred income tax liability	42,706		44,241
Accrued interest payable	56,611		43,107
Lease discounts, net of amortization of $35,296 and $29,016, respectively	12,875		15,842
Total accounts payable, accrued expenses and other liabilities	$	145,691	$	127,527