AeroCentury, an independent aircraft leasing company, reported a Q2/20 net loss of $13.5 million compared with a net loss of $0.1 million for Q2/19. In the first six months of 2020, AeroCentury reported a net loss of $23.7 million compared with a net loss of $1.4 million in the first six months of 2019.
Results for the quarter included impairment losses totaling $9.7 million. The losses arose from appraised values for three regional jet aircraft that are held for sale, estimated sales proceeds for an older turboprop aircraft that is held for sale and which AeroCentury expects to sell during Q4/20 and estimated fair value of two regional jet aircraft that are held for lease.Results for Q2/20 also included $2 million of charges arising from the conversion of AeroCentury’s revolving credit facility to a term loan in May of 2020, including a $1.5 million write-off of a portion of the company’s unamortized debt issuance costs included in interest expense and $0.5 million of costs that is included in professional fees and other.
On May 20, 2020, JetFleet Management, a subsidiary of AeroCentury, was granted a Paycheck Protection Program loan from American Express National Bank in the aggregate amount of $276,353.
“During our second quarter, the COVID pandemic’s impact continued to play out more fully,” Michael Magnusson, president of AeroCentury, said. “Airlines around the world drastically reduced their operations or ceased operating entirely. Many defaulted on lease payments or demanded rent concessions. As a result, aircraft lessors have experienced increasing difficulties meeting financial obligations to their lenders. AeroCentury is no exception. A number of our customers were unable to make rental payments during the second quarter, which dramatically reduced the company’s free cash flow. The pandemic also delayed sales of surplus assets anticipated to close in the second quarter. Finally, the worldwide decrease in demand put significant downward pressure on our aircraft valuations, which required the company during the last quarter to re-appraise our aircraft and take significant asset value write-offs, which further eroded our performance. All of these factors continued to negatively affect the company’s ability to comply with its debt obligations.
“To meet the unprecedented impact that the pandemic has had on the company, we have enacted cost-cutting measures, including reductions in overhead and office space, and we continue to work closely and cooperatively with our defaulting lessees and our lenders to negotiate a workout of our customers’ lease defaults and to restructure our debt obligations accordingly. Many great challenges lie ahead, but we remain hopeful as we are beginning to see signs of adaptation by airlines and passengers to the post-pandemic world and of a slow but steady recovery of the airline industry.”
Q2/20 Highlights and Comparative Data
Net loss was $13.5 million compared with a loss of $10.2 million in the preceding quarter and a loss of $0.1 million a year ago.
EBITDA was $8.3 million compared with $4.7 million in the preceding quarter and $5.3 million a year ago.
Average portfolio utilization was 91% during Q2/20 compared with 83% in the preceding quarter and 99% in Q2/19. The year-to-year decrease was due to aircraft that were on lease in the 2019 period but off lease in the 2020 period.
Revenues in Q2/20 and the first six months of 2020 consisted primarily of operating lease revenue. Revenue of $4.4 million in Q2/20 was 8% less than the $4.8 million in revenue recorded in Q1/20 as a result of rent concessions granted to one of the AeroCentury’s customers due to the COVID-19 pandemic. Second quarter operating lease revenue in the current year was 37% lower than the $7 million in Q2/19 primarily due to rent concessions and reduced rent income resulting from the early termination of four aircraft leases with one of the AeroCentury’s customers in Q3/19.
Total operating expenses increased by 9% to $19.2 million in Q2/20 from $17.7 million in the preceding quarter and increased 72% from $7.3 million in the second quarter a year ago.
During Q2/20, AeroCentury recognized asset impairments of $9.7 million as a result of appraised values on three regional jet aircraft held for sale and estimated sales proceeds for three aircraft, one of which is held for sale, compared with Q1/20 when AeroCentury recognized asset impairments of $6.7 million based on estimated sales proceeds for some of its aircraft. During Q2/19, AeroCentury recognized a $160,000 asset impairment for an asset held for sale based on a third-party appraised value.
Depreciation expense decreased by 8% to $2 million in Q2/20 from $2.2 million in the preceding quarter and decreased by 33% from $3 million in the second quarter a year ago due to the reclassification of several aircraft from held for lease to held for sale during Q3/19.
Interest expense decreased by 26% to $4.5 million in Q2/20 from $6 million in the preceding quarter, primarily due to a decrease in non-cash charges and interest related to AeroCentury’s interest rate swaps, two of which were terminated during Q1/20. Such decreases were partially offset by a $1.5 million write-off of a portion of AeroCentury’s unamortized debt issuance costs during the second quarter that resulted from the conversion of the company’s revolving credit facility to a term loan in May 2020. Interest expense increased 80% from $2.5 million in Q2/19, primarily as a result of a higher average interest rate and the write-off discussed above.
AeroCentury recorded no bad debt expense during Q2/20. As a result of payment delinquencies by two customers that leased two of the company’s aircraft subject to finance leases, AeroCentury recorded a bad debt expense of $1.2 million during Q1/20. AeroCentury recorded no bad debt expense during Q1/19.
Salaries, employee benefits and professional fees and other expenses increased by 78% to $2.9 million from $1.6 million in Q2/19 and increased 85% from $1.6 million in Q1/20 primarily due to increased legal fees arising from the May 2020 conversion of the company’s revolving credit facility to a term loan in May 2020 and litigation relating to an activist shareholder, consulting fees related to the May 2020 debt conversion and increased amortization related to the company’s office lease right of use.
Book value per share was $0.22 as of June 30, 2020 compared with $8.84 at March 31, 2020 and $24.88 a year ago.
Aircraft and Engine Portfolio
AeroCentury’s portfolio currently consists of 13 aircraft, spread over six different aircraft types. Eleven of the aircraft, comprising nine regional jets and two turboprops, are held for lease. Two additional turboprops are held under sales-type leases. AeroCentury also has three turboprop aircraft, two of which are being sold in parts, and three regional jet aircraft that are held for sale. The current customer base comprises seven customers operating in five countries.
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