Aircraft Lease Assets

9 Months Ended

Sep. 30, 2019

Aircraft Lease Assets [Abstract]

Aircraft Lease Assets

As discussed in Note 1, the Company adopted Topic 842 on January 1, 2019, and elected to use certain practical expedients that resulted in continuing the classification of capitalized indirect cost associated with its operating and finance leases. As such, there was no adjustment to its accounts related to the carrying value of its sales-type and finance leases, assets held for lease or capitalized initial direct costs, and its leases continue to be accounted for in the same manner as they had been before adoption of the new accounting standard.

The Company’s leases are normally “triple net leases” under which the lessee is obligated to bear all costs, including tax, maintenance and insurance, on the leased assets during the term of the lease. In most cases, the lessee is obligated to provide a security deposit or letter of credit to secure its performance obligations under the lease, and in some cases is required to pay maintenance reserves based on utilization of the aircraft, which reserves are available for qualified maintenance costs during the lease term and may or may not be refundable at the end of the lease. Typically, the leases also contain minimum return conditions, as well as an economic adjustment payable by the lessee (and in some instances by the lessor) for amounts by which the various aircraft or engine components are worse or better than a targeted condition set forth in the lease. Some leases contain renewal or purchase options, although the Company’s sales-type and finance leases all contain a bargain purchase option at lease end which the Company expects the lessees to exercise or require that the lessee purchase the aircraft at lease-end for a specified price.

Because all of the Company’s leases transfer use and possession of the asset to the lessee and contain no other substantial undertakings by the Company, the Company has concluded that all of its lease contracts qualify for lease accounting under Topic 842. Certain lessee payments of what would otherwise be lessor costs (such as insurance and property taxes) are excluded from both revenue and expense.

The Company evaluates the expected return on its leased assets by considering both the rents receivable over the lease term, any expected additional consideration at lease end, and the residual value of the asset at the end of the lease. In some cases, the Company depreciates the asset to the expected residual value because it expects to sell the asset at lease end; in other cases, it may expect to re-lease the asset to the same or another lessee and the depreciation term and related residual value will differ from the initial lease term and initial residual value. Residual value is estimated by considering future estimates provided by independent appraisers, although it may be adjusted by the Company based on expected return conditions or location, specific lessee considerations, or other market information.

Two of the Company’s operating lease assets are subject to manufacturer residual value guarantees at the end of their lease terms in the fourth quarter of 2020 and totaling approximately $20 million. Three additional aircraft are subject to residual value guarantees, but the Company expects to retain the aircraft after the date of such guarantees and re-lease them to the current or other lessees. The Company considers the best market for managing and/or selling its assets at the end of its leases, although it does not expect to retain ownership of the assets under finance leases given the lessees’ bargain purchase options or required purchase.

(a) Assets Held for Lease

At September 30, 2019 and December 31, 2018, the Company’s aircraft and aircraft engines held for lease consisted of the following:

	September 30, 2019					December 31, 2018
Type	Number Owned		% of net book value			Number owned		% of net book value
Regional jet aircraft		11		83	%		13		81	%
Turboprop aircraft		2		17	%		4		18	%
Engines		-		-	%		1		1	%

The Company did not purchase or sell any aircraft held for lease during the third quarter of 2019. During the quarter, the Company terminated the leases for four of its aircraft held for lease as a result of significant past due payments from the customer and repossessed the aircraft. The customer subsequently ceased operations and declared bankruptcy. The Company applied the security deposits and a portion of collected maintenance reserves it held to the past due rent due from the customer and recorded $16,968,400 of maintenance reserves revenue for the balance of the collected maintenance reserves. The Company also recorded impairment losses totaling $22,339,600 for the four aircraft based on appraised values for three of the aircraft and expected sales proceeds for the fourth aircraft, and reclassified two of the aircraft to held for sale. As a result of the lease terminations, the appraised values were based on the maintenance-adjusted condition of the aircraft, rather than the previous basis, which reflected future cash flows under the leases.

Two of the Company’s aircraft held for lease were off lease at September 30, 2019. As discussed below, the Company has four off-lease aircraft that are held for sale: (i) a turboprop aircraft that was reclassified to held for sale in the third quarter of 2018, for which the Company has a sale agreement and deposit and expects the sale to occur in the fourth quarter of 2019, (ii) a turboprop aircraft that was reclassified to held for sale in the third quarter of 2018 and is subject to a short-term lease and (iii) two regional jet aircraft that were reclassified to held for sale in the third quarter of 2019, one of which the Company expects to sell during the fourth quarter of 2019.

As of September 30, 2019, minimum future lease revenue payments receivable under non-cancelable operating leases were as follows:

Years ending December 31
Remainder of 2019	$	4,776,400
2020		17,421,200
2021		10,319,700
2022		8,567,300
2023		8,567,300
Thereafter		8,446,200
	$	58,098,100

The remaining weighted average lease term of the Company’s assets under operating leases was 37 months and 58 months at September 30, 2019 and December 31, 2018, respectively.

(b) Sales-Type and Finance Leases

As a result of a lease amendment containing a purchase option for an older aircraft at lease end during the second quarter of 2019, the Company reclassified an asset that was previously held for lease to a sales-type finance lease receivable and recorded a loss of $170,600.

During the second quarter of 2019, the Company also amended the sales-type leases for two aircraft to accommodate the lessee’s request to transfer a portion of future lease payment obligations from one of the leases to the other, as well as to assign one of the leases and related aircraft to a different lessee. Payments for both leases were also amended to reflect a higher implicit interest rate, such that the fair value of the leases after amendment equaled the carrying value of the leases before the amendment. No gain or loss was recognized as a result of these lease modifications. As a result of payment delinquencies by these two customers, during the third quarter of 2019, the Company recorded a bad debt allowance of $3,918,000.

At September 30, 2019 and December 31, 2018, the net investment included in sales-type finance leases and direct financing leases receivable were as follows:

	September 30, 2019			December 31, 2018
Gross minimum lease payments receivable	$	17,286,300		$	17,107,100
Less unearned interest		(1,295,500	)		(1,856,200	)
Finance leases receivable	$	15,990,800		$	15,250,900

As of September 30, 2019, minimum future payments receivable under finance leases were as follows:

Years ending December 31
Remainder of 2019	$	5,279,600
2020		4,708,200
2021		5,085,400
2022		2,213,100
	$	17,286,300

The remaining weighted average lease term of the Company’s assets under sales-type and finance leases was 20 months and 32 months at September 30, 2019 and December 31, 2018, respectively.