WASHINGTON, D.C. 20549
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We do not undertake any obligation to publicly update or review any forward-looking statement except as required by law, whether as a result of new information, future developments or otherwise.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
I. For the Three Months Ended JuneSeptember 30, 2022
Summary information with respect to our geographic sources of revenue, based on location of customer, is as follows:
Summary information with respect to our geographic sources of revenue, based on location of customer, is as follows:
V. Balance Sheet and Location of Long-Lived Assets
42
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand Fortress Transportation and Infrastructure Investors LLCFTAI Aviation Ltd. (the “Company,” “we,” “our” or “us”). Our MD&A should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes, and with Part II, Item 1A, “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.
Overview
We own and acquire high quality infrastructure and relatedaviation equipment that is essential for the transportation of goods and people globally. We target assets that, on a combined basis, generate strong cash flows with potential for earnings growth and asset appreciation.growth. We believe that there is a large number of acquisition opportunities in our marketsmarket, and that ourthe Manager’s expertise and business and financing relationships, together with our Parent’s access to capital, will allow us to take advantage of these opportunities. We areOur Parent is externally managed by FIG LLC (the “Manager”),the Manager, an affiliate of Fortress, Investment Group LLC (“Fortress”), which has a dedicated team of experienced professionals focused on the acquisition of transportation and infrastructureaviation assets since 2002. As of JuneSeptember 30, 2022 we had total consolidated assets of $4.9$2.0 billion and total equity of $0.7$1.8 billion.
Our strategy permits us to acquire a broad array of aviation related assets where we believe there are meaningful opportunities to deploy capital to achieve attractive risk adjusted returns. Commercial air travel and air freight activity have historically been long-term growth sectors and are tied to the underlying demand for passenger and freight movement. We continue to see long-term demand for aviation related assets.
Impact of Russia’s InvasionRussia invasion of Ukraine
Due to Russia’s invasion of Ukraine during the first quarter of 2022, the United States, European Union, United Kingdom, and others have imposed economic sanctions and export controls against Russia and Russia’s aviation industry. The sanctions include but are not limited to the ban on the export and sale or lease of all aircraft, engines, and equipment and on all related repair and maintenance services to Russia and Russian airlines. We have complied, and will continue to comply, with all applicable sanctions and we have terminated the leases of all our aircraft and engines with Russian airlines. As a result of the sanctions imposed on Russian airlines and related lease terminations, we recognized approximately $47.2$47.1 million in bad debt expenseprovision for credit losses during the sixnine months ended JuneSeptember 30, 2022.
We continue to pursue efforts to remove and repossess all of our aircraft and engines from Russia and Ukraine. As of June 30, 2022, we had detained six of our aircraft and four of our engines outside of Russia. As of JuneSeptember 30, 2022, four aircraft and two engines were still located in Ukraine and eight aircraft and seventeen engines were still located in Russia. We determined that it is unlikely that we will regain possession of the aircraft that had not been recovered from Ukraine and Russia during the first quarter of 2022. As a result, we recognized an impairment charge totaling $120.0 million, net of maintenance deposits, to write-off the carrying value of leasing equipment assets that we have not recovered from Ukraine and Russia for the sixnine months ended JuneSeptember 30, 2022.
Our lessees are required to provide insurance coverage with respect to leased aircraft and engines, and we are named as insureds under those policies in the event of a total loss of an aircraft or engine. We also purchase insurance which provides us with coverage when our aircraft or engines are not subject to a lease or where a lessee’s policy fails to indemnify us. The insured value of the aircraft and engines that remain in Ukraine and Russia is approximately $294.0 million. We intend to pursueare pursuing all our claims under these policies. However, the timing and amount of any recoveries under these policies are uncertain.
The extent of the impact of Russia’s invasion of Ukraine and the related sanctions on our operational and financial performance, including the ability for us to recover our leasing equipment in the region, will depend on future developments, including the duration of the conflict, sanctions and restrictions imposed by Russian and international governments, all of which remain uncertain.
Impact of COVID-19
Due to the outbreak of COVID-19, we have taken measures to protect the health and safety of our employees, including having employees work remotely, where possible. Market conditions due to the outbreak of COVID-19 resulted in asset impairment charges and a decline in our equipment leasing revenues during the years ended December 31, 2021 and 2020. However, our equipment leasing revenues have continued to recover during the sixnine months ended June 30, 2022. A number of our lessees continue to experience increased financial stress due to the significant decline in travel demand, particularly as various regions experience spikes in COVID-19 cases. A number of these lessees have been placed on non-accrual status as of June 30, 2022; however, we believe our overall portfolio exposure is limited by maintenance reserves and security deposits which are secured against lessee defaults. The value of these deposits was $84.8 million as of JuneSeptember 30, 2022. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration, severity and spread of the pandemic, as well as additional waves of COVID-19 infections and the ultimate impact of related restrictions imposed by the U.S. and international governments, all of which remain uncertain. For additional detail, see Liquidity and Capital Resources and Part II, Item 1A. Risk Factors—“The COVID-19 pandemic has severely disrupted the global economy and may have, and the emergence of similar crises could have, material adverse effects on our business, results of operations or financial condition.”
Operating Segments
Our operations consist
During the third quarter of two primary strategic2022, as a result of the Parent’s spin-off of the infrastructure business units – Infrastructureon August 1, 2022, and Equipment Leasing. Our Infrastructure Business acquires long-lived assets that provide mission-critical services or functionsits reevaluation of segments, the Company reevaluated its operating segments. The key factors used to transportation networks and typically
have high barriers to entry. We target or develop operating businesses with strong margins, stable cash flows and upside from earnings growth and asset appreciation driven by increased use and inflation. Our Equipment Leasing Business acquires assets that are designed to carry cargo or people or provide functionality to transportation infrastructure. Transportation equipment assets are typically long-lived, moveable and leased by us on either operating leases or finance leases to companies that provide transportation services. Our leases generally provide for long-term contractual cash flow with high cash-on-cash yields and include structural protections to mitigate credit risk.
Ouridentify the reportable segments are comprisedthe organization and alignment of interests in different typesour internal operations and the nature of infrastructureour products and equipment leasing assets. We currently conduct our business through the following fourservices. Our two reportable segments:segments are (i) Aviation Leasing which is within the Equipment Leasing Business, and (ii) Jefferson Terminal, (iii) Ports and Terminals and (iv) Transtar, which together comprise our Infrastructure Business.Aerospace Products. The Aviation Leasing segment consists ofowns and manages aviation assets, including aircraft and aircraft engines, heldwhich it leases and sells to customers. The Aerospace Products segment develops, manufactures, repairs, and sells aircraft engines and aftermarket components for lease and are typically held long-term.aircraft engines. The Jefferson Terminal segment consistsinterim periods disclose the reportable segments under this basis with prior periods restated to reflect the change in accordance with the requirements of a multi-modal crude and refined products terminal and other related assets. The Ports and Terminals segment consists of Repauno, which is a 1,630-acre deep-water port located along the Delaware River with an underground storage cavern, a new multipurpose dock, a rail-to-ship transloading system and multiple industrial development opportunities, and an equity method investment (“Long Ridge”), which is a 1,660-acre multi-modal port located along the Ohio River with rail, dock, and multiple industrial development opportunities, including a power plant in operation.ASC 280.
In July 2021, we acquired Transtar and it operates as a separate reportable segment within our Infrastructure business. Transtar is comprised of five freight railroads and one switching company that provide rail service to certain manufacturing and production facilities.
Corporate and Other primarily consists of debt, unallocatedallocated corporate general and administrative expenses, shared services costs, and management fees. Additionally, Corporate and Other includes (i) offshore energy related assets which consist of vessels and equipment that support offshore oil and gas activities and are typically subject to operating leases, (ii) an investment in an unconsolidated entity engaged in the leasing of shipping containers and (iii) railroad assets which consist of equipment that support a railcar cleaning business and (iv) various clean technology and sustainability investments.
Our reportable segments are comprised of investments in different types of transportation infrastructure and equipment. Each segment requires different investment strategies. The accounting policies of the segments are the same as those described in Note 2 to the consolidated financial statements; however, financial information presented by segment includes the impact of intercompany eliminations.
Spin-Off of FTAI Infrastructure
The Board of Directors delegated to a special committee comprised solely of independent and disinterested board members the full power and responsibility to, among other things, (i) review, evaluate and negotiate certain transactions relating to the management agreements, the treatment of certain income incentive allocations and capital gains incentive allocations and the treatment of certain outstanding options held by the Manager and the non-employee directors of the Company (collectively, the “Specified Matters”) and (ii) act with respect to the Specified Matters. The special committee, after consultation with its independent legal and financial advisors, unanimously approved the terms of, and the entry into the agreements providing for, the Specified Matters. Following the determination of the special committee, on April 28, 2022, the Board of Directors unanimously approved the previously announced spin-off of the Company’s infrastructure business (“FTAI Infrastructure”), subject to the Board of Directors declaring the distribution prior to the closing of the transaction. FTAI Infrastructure has been approved to list its common stock on The Nasdaq Global Select Market under the symbol “FIP.” On July 11, 2022, the Board of Directors unanimously approved the details and timing of the spin-off. The spin-off will be effected as a distribution of all of the shares owned by the Company of common stock of FTAI Infrastructure, a majority-owned subsidiary of the Company, to the holders of the Company’s common shares as of July 21, 2022. The distribution is expected to occur on or about August 1, 2022, subject to certain conditions.
FTAI Infrastructure is expected to be spun out in an entity taxed as a corporation for U.S. federal income tax purposes and will hold, among other things, the Company’s (i) Jefferson Terminal business, (ii) Repauno business, (iii) Long Ridge investment, and (iv) Transtar business. FTAI Infrastructure will retain all related project-level debt of those entities. In connection with the spin-off, FTAI Infrastructure entered into subscription agreements to issue $300.0 million of preferred stock and warrants and sold $500.0 million of senior secured notes due 2027, the net proceeds of which will be remitted to the Company in connection with the separation. The Company expects to use the proceeds received from FTAI Infrastructure to repay all outstanding borrowings under its 2021 bridge loans and a portion of borrowings under its revolving credit facility with the remaining proceeds to repay a portion of its 6.50% senior unsecured notes due 2025 (the “2025 Notes”). On June 30, 2022, the Company issued a conditional notice of partial redemption to redeem $200 million aggregate principal amount of its outstanding 2025 Notes. FTAI expects to retain the aviation business and certain other assets and FTAI’s remaining outstanding corporate indebtedness.
FTAI Infrastructure will be externally managed by the Manager. In connection with the spin-off, the Company and the Manager have agreed to assign the Company’s existing management agreement to FTAI Infrastructure, and FTAI Infrastructure and the Manager have agreed to amend and restate the agreement in connection with the closing of the spin-off. The amended and restated management agreement will have an initial term of six years. Similar to the Company’s existing management arrangements, the Manager will be entitled to a management fee, incentive allocations (comprised of income incentive allocation and capital gains incentive allocation) and reimbursement of certain expenses on substantially similar terms as the existing
arrangements with the Manager, except that all fees will be paid pursuant to the amended and restated management agreement rather than by one of FTAI Infrastructure’s subsidiaries.
The Company and certain of its subsidiaries will enter into a new management agreement with the Manager. The new management agreement will have an initial term of six years. The Manager will be entitled to a management fee and reimbursement of certain expenses on substantially similar terms as the existing arrangements with the Manager. Prior to the merger described below, our Manager will remain entitled to incentive allocations (comprised of income incentive allocation and capital gains incentive allocation) on the same terms as they exist today. Following the merger, the Company will enter into a Services and Profit Sharing Agreement (the “Services Agreement”), with a subsidiary of the Company and Fortress Worldwide Transportation and Infrastructure Master GP LLC (“Master GP”), pursuant to which Master GP will be entitled to incentive allocations on substantially similar terms as the existing arrangements. Following the completion of the spin-off, the Company plans to pursue a merger transaction with a subsidiary of the Company pursuant to which the Company will become a wholly-owned subsidiary of a company organized under the laws of the Cayman Islands and shareholders of the Company would become shareholders of the Cayman Islands entity. This merger transaction will be subject to approval by holders of the Company’s common shares.
Our Manager
On December 27, 2017, SoftBank Group Corp. (“SoftBank”) completed its acquisition of Fortress (the “SoftBank Merger”). In connection with the Softbank Merger, Fortress operates within SoftBank as an independent business headquartered in New York.
Results of Operations
Adjusted EBITDA (Non-GAAP)(non-GAAP)
The chief operating decision maker (“CODM”) utilizes Adjusted EBITDA as the key performance measure. Adjusted EBITDA is not a financial measure in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). This performance measure provides the CODM with the information necessary to assess operational performance, as well as make resource and allocation decisions. We believe Adjusted EBITDA is a useful metric for investors and analysts for similar purposes of assessing our operational performance.
Adjusted EBITDA is defined as net income (loss) attributable to shareholders, adjusted (a) to exclude the impact of provision for (benefit from) income taxes, equity-based compensation expense, acquisition and transaction expenses, losses on the modification or extinguishment of debt and capital lease obligations, changes in fair value of non-hedge derivative instruments, asset impairment charges, incentive allocations, depreciation and amortization expense, and interest expense, (b) to include the impact of our pro-rata share of Adjusted EBITDA from unconsolidated entities, and (c) to exclude the impact of equity in earnings (losses) of unconsolidated entities and the non-controlling share of Adjusted EBITDA.
Comparison of the three and sixnine months ended JuneSeptember 30, 2022 and 2021
The following table presents our consolidated results of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2022 | | 2021 | | | 2022 | | 2021 | |
Revenues | | | | | | | | | | | |
Equipment leasing revenues | | | | | | | | | | | |
Lease income | $ | 39,538 | | | $ | 42,902 | | | $ | (3,364) | | | $ | 78,752 | | | $ | 83,129 | | | $ | (4,377) | |
Maintenance revenue | 39,932 | | | 32,003 | | | 7,929 | | | 76,664 | | | 47,511 | | | 29,153 | |
Finance lease income | 102 | | | 443 | | | (341) | | | 213 | | | 846 | | | (633) | |
Other revenue | 32,492 | | | 6,223 | | | 26,269 | | | 48,126 | | | 6,692 | | | 41,434 | |
Total equipment leasing revenues | 112,064 | | | 81,571 | | | 30,493 | | | 203,755 | | | 138,178 | | | 65,577 | |
Infrastructure revenues | | | | | | | | | | | |
Lease income | 867 | | | 432 | | | 435 | | | 1,707 | | | 862 | | | 845 | |
Rail revenues | 37,507 | | | — | | | 37,507 | | | 71,175 | | | — | | | 71,175 | |
Terminal services revenues | 14,227 | | | 11,120 | | | 3,107 | | | 27,011 | | | 21,541 | | | 5,470 | |
| | | | | | | | | | | |
Other revenue | 13,267 | | | 3,792 | | | 9,475 | | | 12,123 | | | 13,483 | | | (1,360) | |
Total infrastructure revenues | 65,868 | | | 15,344 | | | 50,524 | | | 112,016 | | | 35,886 | | | 76,130 | |
Total revenues | 177,932 | | | 96,915 | | | 81,017 | | | 315,771 | | | 174,064 | | | 141,707 | |
| | | | | | | | | | | |
Expenses | | | | | | | | | | | |
Operating expenses | 84,004 | | | 31,183 | | | 52,821 | | | 192,920 | | | 56,180 | | | 136,740 | |
General and administrative | 5,004 | | | 3,655 | | | 1,349 | | | 10,695 | | | 7,907 | | | 2,788 | |
Acquisition and transaction expenses | 9,626 | | | 4,399 | | | 5,227 | | | 15,650 | | | 6,042 | | | 9,608 | |
Management fees and incentive allocation to affiliate | 3,062 | | | 4,113 | | | (1,051) | | | 7,226 | | | 8,103 | | | (877) | |
Depreciation and amortization | 56,622 | | | 47,371 | | | 9,251 | | | 114,923 | | | 91,906 | | | 23,017 | |
Asset impairment | 886 | | | 89 | | | 797 | | | 123,676 | | | 2,189 | | | 121,487 | |
Interest expense | 54,373 | | | 37,504 | | | 16,869 | | | 104,971 | | | 70,494 | | | 34,477 | |
Total expenses | 213,577 | | | 128,314 | | | 85,263 | | | 570,061 | | | 242,821 | | | 327,240 | |
| | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | |
Equity in losses of unconsolidated entities | (13,823) | | | (7,152) | | | (6,671) | | | (37,836) | | | (5,778) | | | (32,058) | |
Gain on sale of assets, net | 63,645 | | | 3,987 | | | 59,658 | | | 79,933 | | | 4,798 | | | 75,135 | |
Loss on extinguishment of debt | — | | | (3,254) | | | 3,254 | | | — | | | (3,254) | | | 3,254 | |
Interest income | 590 | | | 454 | | | 136 | | | 1,246 | | | 739 | | | 507 | |
Other (expense) income | (1,596) | | | (884) | | | (712) | | | (2,055) | | | (703) | | | (1,352) | |
Total other income (expense) | 48,816 | | | (6,849) | | | 55,665 | | | 41,288 | | | (4,198) | | | 45,486 | |
Income (loss) from before income taxes | 13,171 | | | (38,248) | | | 51,419 | | | (213,002) | | | (72,955) | | | (140,047) | |
Provision for (benefit from) income taxes | 3,411 | | | (1,640) | | | 5,051 | | | 6,897 | | | (1,471) | | | 8,368 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income (loss) | 9,760 | | | (36,608) | | | 46,368 | | | (219,899) | | | (71,484) | | | (148,415) | |
| | | | | | | | | | | |
Less: Net loss attributable to non-controlling interest in consolidated subsidiaries | (8,480) | | | (6,625) | | | (1,855) | | | (15,946) | | | (11,586) | | | (4,360) | |
| | | | | | | | | | | |
Less: Dividends on preferred shares | 6,791 | | | 6,551 | | | 240 | | | 13,582 | | | 11,176 | | | 2,406 | |
Net income (loss) attributable to shareholders | $ | 11,449 | | | $ | (36,534) | | | $ | 47,983 | | | $ | (217,535) | | | $ | (71,074) | | | $ | (146,461) | |
| | Three Months Ended September 30, | | |
| | | Nine Months Ended September 30, | | |
| |
(in thousands) | | 2022 | | | 2021 | | | Change | | | 2022 | | | 2021 | | | Change | |
Revenues | | | | | | | | | | | | | | | | | | |
Lease income | | $ | 40,273 | | | $ | 40,392 | | | $ | (119 | ) | | $ | 111,316 | | | $ | 120,389 | | | $ | (9,073 | ) |
Maintenance revenue | | | 35,507 | | | | 40,252 | | | | (4,745 | ) | | | 112,171 | | | | 87,763 | | | | 24,408 | |
Finance lease income | | | 119 | | | | 439 | | | | (320 | ) | | | 332 | | | | 1,285 | | | | (953 | ) |
Aerospace products revenue | | | 53,401 | | | | 7,730 | | | | 45,671 | | | | 94,211 | | | | 13,284 | | | | 80,927 | |
Asset sales revenue | | | 85,488 | | | | — | | | | 85,488 | | | | 85,488 | | | | — | | | | 85,488 | |
Other revenue | | | 3,461 | | | | 5,125 | | | | (1,664 | ) | | | 8,687 | | | | 5,761 | | | | 2,926 | |
Total revenues | | | 218,249 | | | | 93,938 | | | | 124,311 | | | | 412,205 | | | | 228,482 | | | | 183,723 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | 14,612 | | | | 10,130 | | | | 4,482 | | | | 83,651 | | | | 20,641 | | | | 63,010 | |
Cost of sales | | | 95,948 | | | | 5,367 | | | | 90,581 | | | | 120,139 | | | | 8,577 | | | | 111,562 | |
General and administrative | | | 3,354 | | | | 2,862 | | | | 492 | | | | 9,125 | | | | 7,166 | | | | 1,959 | |
Acquisition and transaction expenses | | | 2,848 | | | | 1,132 | | | | 1,716 | | | | 5,449 | | | | 3,710 | | | | 1,739 | |
Management fees and incentive allocation to affiliate | | | 539 | | | | 2,116 | | | | (1,577 | ) | | | 4,692 | | | | 7,027 | | | | (2,335 | ) |
Depreciation and amortization | | | 32,877 | | | | 34,825 | | | | (1,948 | ) | | | 106,567 | | | | 102,194 | | | | 4,373 | |
Asset impairment | | | 4,495 | | | | 859 | | | | 3,636 | | | | 128,171 | | | | 3,048 | | | | 125,123 | |
Interest expense | | | 644 | | | | 584 | | | | 60 | | | | 1,910 | | | | 1,734 | | | | 176 | |
Total expenses | | | 155,317 | | | | 57,875 | | | | 97,442 | | | | 459,704 | | | | 154,097 | | | | 305,607 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other (expense) income | | | | | | | | | | | | | | | | | | | | | | | | |
Equity in losses of unconsolidated entities | | | (358 | ) | | | (369 | ) | | | 11 | | | | (125 | ) | | | (1,050 | ) | | | 925 | |
Gain on sale of assets, net | | | — | | | | 12,685 | | | | (12,685 | ) | | | 79,933 | | | | 17,467 | | | | 62,466 | |
Other income (expense) | | | 42 | | | | (1,341 | ) | | | 1,383 | | | | 245 | | | | (717 | ) | | | 962 | |
Total other (expense) income | | | (316 | ) | | | 10,975 | | | | (11,291 | ) | | | 80,053 | | | | 15,700 | | | | 64,353 | |
Income before income taxes | | | 62,616 | | | | 47,038 | | | | 15,578 | | | | 32,554 | | | | 90,085 | | | | (57,531 | ) |
Provision for income taxes | | | 3,818 | | | | 500 | | | | 3,318 | | | | 7,252 | | | | 1,037 | | | | 6,215 | |
Net income attributable to shareholders | | | 58,798 | | | | 46,538 | | | | 12,260 | | | | 25,302 | | | | 89,048 | | | | (63,746 | ) |
The following table sets forth a reconciliation of net income (loss) attributable to shareholders to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2022 | | 2021 | | | 2022 | | 2021 | |
Net income (loss) attributable to shareholders | $ | 11,449 | | | $ | (36,534) | | | $ | 47,983 | | | $ | (217,535) | | | $ | (71,074) | | | $ | (146,461) | |
Add: Provision for (benefit from) income taxes | 3,411 | | | (1,640) | | | 5,051 | | | 6,897 | | | (1,471) | | | 8,368 | |
Add: Equity-based compensation expense | 1,585 | | | 1,439 | | | 146 | | | 2,294 | | | 2,553 | | | (259) | |
Add: Acquisition and transaction expenses | 9,626 | | | 4,399 | | | 5,227 | | | 15,650 | | | 6,042 | | | 9,608 | |
Add: Losses on the modification or extinguishment of debt and capital lease obligations | — | | | 3,254 | | | (3,254) | | | — | | | 3,254 | | | (3,254) | |
Add: Changes in fair value of non-hedge derivative instruments | (1,514) | | | 1,391 | | | (2,905) | | | (748) | | | (6,573) | | | 5,825 | |
Add: Asset impairment charges | 886 | | | 89 | | | 797 | | | 123,676 | | | 2,189 | | | 121,487 | |
Add: Incentive allocations | — | | | — | | | — | | | — | | | — | | | — | |
Add: Depreciation and amortization expense (1) | 68,427 | | | 54,168 | | | 14,259 | | | 138,741 | | | 106,811 | | | 31,930 | |
Add: Interest expense | 54,373 | | | 37,504 | | | 16,869 | | | 104,971 | | | 70,494 | | | 34,477 | |
Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (2) | 6,977 | | | (11) | | | 6,988 | | | 12,638 | | | 2,391 | | | 10,247 | |
Less: Equity in losses of unconsolidated entities | 13,823 | | | 7,152 | | | 6,671 | | | 37,836 | | | 5,778 | | | 32,058 | |
Less: Non-controlling share of Adjusted EBITDA (3) | (3,716) | | | (3,257) | | | (459) | | | (7,532) | | | (5,286) | | | (2,246) | |
Adjusted EBITDA (non-GAAP) | $ | 165,327 | | | $ | 67,954 | | | $ | 97,373 | | | $ | 216,888 | | | $ | 115,108 | | | $ | 101,780 | |
(1) | | Three Months Ended September 30, | | |
| | | Nine Months Ended September 30, | | |
| |
(in thousands) | | 2022 | | | 2021 | | | Change | | | 2022 | | | 2021 | | | Change | |
Net income attributable to shareholders | | $ | 58,798 | | | $ | 46,538 | | | $ | 12,260 | | | $ | 25,302 | | | $ | 89,048 | | | $ | (63,746 | ) |
Add: Provision for income taxes | | | 3,818 | | | | 500 | | | | 3,318 | | | | 7,252 | | | | 1,037 | | | | 6,215 | |
Add: Acquisition and transaction expenses | | | 2,848 | | | | 1,132 | | | | 1,716 | | | | 5,449 | | | | 3,710 | | | | 1,739 | |
Add: Asset impairment charges | | | 4,495 | | | | 859 | | | | 3,636 | | | | 128,171 | | | | 3,048 | | | | 125,123 | |
Add: Depreciation and amortization expense (1) | | | 39,353 | | | | 41,269 | | | | (1,916 | ) | | | 136,860 | | | | 123,543 | | | | 13,317 | |
Add: Interest expense | | | 644 | | | | 584 | | | | 60 | | | | 1,910 | | | | 1,734 | | | | 176 | |
Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (2) | | | (241 | ) | | | (312 | ) | | | 71 | | | | 165 | | | | (906 | ) | | | 1,071 | |
Less: Equity in losses of unconsolidated entities | | | 358 | | | | 369 | | | | (11 | ) | | | 125 | | | | 1,050 | | | | (925 | ) |
Adjusted EBITDA (non-GAAP) | | $ | 110,073 | | | $ | 90,939 | | | $ | 19,134 | | | $ | 305,234 | | | $ | 222,264 | | | $ | 82,970 | |
(1) | Includes the following items for the three months ended September 30, 2022 and 2021: (i) depreciation and amortization expense of $32,877 and $34,825, (ii) lease intangible amortization of $3,291 and $1,266 and (iii) amortization for lease incentives of $3,185 and $5,178, respectively. Includes the following items for the nine months ended September 30, 2022 and 2021: (i) depreciation and amortization expense of $106,567 and $102,194, (ii) lease intangible amortization of $10,259 and $3,216 and (iii) amortization for lease incentives of $20,034 and $18,133, respectively. |
(2) | Includes the following items for the three months ended September 30, 2022 and 2021: (i) net loss of $358 and $369 and (ii) depreciation and amortization expense of $117 and $57, respectively. Includes the following items for the nine months ended September 30, 2022 and 2021: (i) net loss of $125 and $1,050 and (ii) depreciation and amortization expense of $290 and $144, respectively. |
Revenues
Presentation of assets sales
During the three months ended September 30, 2022, we updated our corporate strategy based on the opportunities available in the market such that the sale of aircraft and engines is now an output of our recurring, ordinary activities. As a result of this update, the transaction price allocated to the sale of assets is included in Revenues in the Consolidated Statement of Operations for the three months ended JuneSeptember 30, 2022 and 2021: (i) depreciation and amortization expenseare accounted for in accordance with ASC 606. The corresponding net book values of $56,622 and $47,371, (ii) lease intangible amortizationthe assets sold are recorded in Cost of $3,310 and $1,198 and (iii) amortization for lease incentivessales in the Consolidated Statement of $8,495 and $5,599, respectively. Includes the following items for the six months ended June 30, 2022 and 2021: (i) depreciation and amortization expense of $114,923 and $91,906, (ii) lease intangible amortization of $6,968 and $1,950 and (iii) amortization for lease incentives of $16,850 and $12,955, respectively.
(2) Includes the following itemsOperations for the three months ended JuneSeptember 30, 20222022. Sales transactions of aircraft and 2021: (i) net loss of $(13,883) and $(7,353), (ii) interest expense of $6,795 and $340, (iii) depreciation and amortization expense of $6,465 and $1,900, (iv) acquisition and transaction expenses of $387 and $—, (v) changes in fair value of non-hedge derivative instruments of $7,118 and $5,078, (vi) equity-based compensation of $95 and $— and (vii) asset impairment of $— and $24, respectively. Includes the following items for the six months ended June 30, 2022 and 2021: (i) net loss of $(35,773) and $(6,173), (ii) interest expense of $13,258 and $527, (iii) depreciation and amortization expense of $12,805 and $3,812, (iv) acquisition and transaction expenses of $391 and $—, (v) changes in fair value of non-hedge derivative instruments of $21,732 and $4,201, (vi) equity-based compensation of $193 and $— and (vii) asset impairment of $32 and $24, respectively.
(3) Includes the following items forengines prior to the three months ended JuneSeptember 30, 2022 were accounted for in accordance with ASC 610-20, Gains and 2021: (i) equity-based compensationlosses from the derecognition of $124nonfinancial assets and $292, (ii) provision for income taxeswere included inGain on sale of $14assets, net on the Consolidated Statement of Operations, as we were previously only occasionally selling these assets. Generally, assets sold were under leasing arrangements with customers prior to sales and $13, (iii) interest expense of $1,319 and $732, (iv) depreciation and amortization expense of $2,321 and $2,172 and (v) changesare included in fair value of non-hedge derivative instruments of $(62) and $48, respectively. IncludesLeasing equipment, net, on the following items for the six months ended June 30, 2022 and 2021: (i) equity-based compensation of $250 and $490, (ii) provision for income taxes of $30 and $26, (iii) interest expense of $2,703 and $1,013, (iv) depreciation and amortization expense of $4,585 and $3,983 and (v) changes in fair value of non-hedge derivative instruments of $(36) and $(226), respectively.Consolidated Balance Sheets.
Revenues
Comparison of the three months ended JuneSeptember 30, 2022 and 2021
Total revenues increased $81.0$124.3 million driven by an increase in (i) asset sales revenue and (ii) Aerospace Products revenue partially offset by decreases in (iii) lease income, (iv) maintenance revenue and (v) other revenue.
Asset sales revenue increased $85.5 million primarily due to higher revenues of $50.5 millionan increase in the Infrastructure business mostly attributablesale of commercial aircraft and engines in our Aviation Leasing segment during 2022. See above discussion regarding presentation of asset sales.
Aerospace Products revenue increased $45.7 million driven by an increase in sales relating to the Transtar segmentCFM56-7B and $30.5 millionCFM56-5B engines, engine modules, spare parts and used material inventory as operations continue to ramp-up in the Aviation Leasing segment.2022. See above discussion regarding presentation of asset sales.
Equipment Leasing
OtherMaintenance revenue increased $26.3 million, which primarily reflects an increase of $25.9decreased $4.7 million in the Aviation Leasing segment, primarily due to the early redelivery of aircraft and lower maintenance billings related to the early termination of aircraft leases with Russian airlines as a result of the sanctions imposed on Russian airlines, partially offset by an increase in the number of aircraft and engines placed on lease and higher aircraft and engine utilization.
Other revenue decreased $1.7 million in the Aviation Leasing segment due to lower end-of lease redelivery compensation.
Comparison of the nine months ended September 30, 2022 and 2021
Total revenues increased $183.7 million driven by an increase in (i) asset sales revenue, (ii) Aerospace Products revenue, (iii) maintenance revenue and (iv) other revenue, partially offset by a decreases in (v) lease income.
Asset sales revenue increased $85.5 million primarily due to an increase in the sale of commercial aircraft and engines in our Aviation Leasing segment in 2022. See above discussion regarding presentation of asset sales.
Aerospace Products revenue increased $80.9 million driven by an increase in sales relating to the CFM56-7B and CFM56-5B engines, engine modules, spare parts and used material inventory as operations continue to ramp-up in 2022. See above discussion regarding presentation of asset sales.
Maintenance revenue increased $7.9$24.4 million in the Aviation Leasing segment, primarily due to an increase in the number of aircraft and engines placed on lease, higher aircraft and engine utilization and higher end-of-lease return compensation, partially offset by a decrease in the recognition of maintenance deposits due to the early redelivery of aircraft and lower maintenance billings related to the early termination of aircraft leases with Russian airlines as a result of the sanctions imposed on Russian airlines.
Other revenue increased $2.9 million in the Aviation Leasing segment due to an increase in end-of lease redelivery compensation.
Lease income decreased $3.4$9.1 million, which primarily reflects (i) a decrease of $3.0$9.1 million in the Aviation Leasing segment primarily due to the early termination of aircraft and engine leases as a result of the sanctions imposed on Russian airlines. Basic lease revenues from our owned aircraft and engines leased to Russian airlines and (ii) awould have been approximately $30.2 million for the nine months ended September 30, 2022. This decrease of $0.4 millionis partially offset by an increase in the offshore energy business as onenumber of our vessels was on-hire longer in 2021 compared to 2022 due to a necessary crane repair in 2022.aircraft and engines placed on lease.
Infrastructure
Rail revenues increased $37.5 million due to our acquisition of Transtar in July 2021.
Other revenue increased $9.5 million, primarily due to the acquisition of a majority stake in and consolidation of FYX during the quarter.
Comparison of the sixthree months ended JuneSeptember 30, 2022 and 2021
Total revenuesexpenses increased $141.7$97.4 million, primarily due to higher (i) cost of sales, (ii) operating expenses (iii) asset impairment and (iv) acquisition and transaction expenses, partially offset by lower (v) depreciation and amortization and (vi) management fees and incentive allocation to affiliate.
Cost of Sales increased $90.6 million primarily as a result of increased asset sales and the gross presentation of asset sales revenue and Aerospace Product revenues as described above.
Operating expenses increased $4.5 million which primarily reflects:
an increase of $72.1 million in the Transtar segment, $59.4$3.3 million in the Aviation Leasing segment, $10.1 million attributable to the acquisitionSegment primarily as a result of FYX,an increase in insurance expense, shipping and storage fees, professional fees and other operating expenses, partially offset by lower revenuesa decrease in provision for credit losses.
an increase of $10.8$1.7 million in the Ports and Terminals segment.
Equipment Leasing
Other revenue increased $41.4 million, which primarily reflects an increase of $39.8 million in the Aviation Leasing segmentAerospace Products Segment primarily due to an increase in engine modules, spare parts andcommission expenses due to the increase in sales from the used material inventory sales.program as well as an increase in professional fees and other operating expenses due to the ramp-up of Aerospace Products.
Maintenance revenue
Asset impairment increased $29.2$3.6 million for the adjustment of the carrying value of leasing equipment to fair value in our Aviation Leasing segment. See Note 3 to the consolidated financial statements for additional information.
Acquisition and transaction expenses increased $1.7 million primarily driven by higher compensation and related costs associated with acquisitions and the merger with FTAI.
Depreciation and amortization decreased $1.9 million primarily due to an increase in the number of aircraft redelivered and engines placed on lease,parted out into our engine leasing pool.
Management fees and incentive allocation to affiliate decreased $1.6 million driven by lower management fees allocated to the Company.
Comparison of the nine months ended September 30, 2022 and 2021
Total expenses increased $305.6 million, primarily due to higher aircraft(i) asset impairment charges, (ii) cost of sales, (iii) operating expenses, (iv) depreciation and engine utilization and higher end-of-lease return compensation,amortization, partially offset by a decrease in the recognition of maintenance depositslower (v) management fees and incentive allocation to affiliate.
Asset impairment increased $125.1 million primarily due to the early redeliverywrite down of aircraft and lower maintenance billings relatedengines located in Ukraine and Russia that may not be recoverable. See Note 3 to the early terminationconsolidated financial statements for additional information.
Cost of aircraft leases with Russian airlinessales increased $111.6 million primarily as a result of an increase in asset sales and the sanctions imposed on Russian airlines.gross presentation of asset sales revenue and Aerospace Product revenues as described above.
Lease income decreased $4.4
Operating expenses increased $63.0 million which primarily reflects (i) a decreasereflects:
an increase of $9.0$58.0 million in the Aviation Leasing segment primarily due to the early terminationas a result of aircraft and engine leasesan increase in provision for credit losses as a result of the sanctions imposed on Russian airlines, partially offset by (ii) an increase in insurance expense, shipping and storage fees, professional fees and repairs and maintenance expenses.
an increase of $4.6 million in the offshore energy business as two of our vessels were on-hire longer in 2022 compared to 2021.
Infrastructure
Rail revenues increased $71.2 million due to our acquisition of Transtar in July 2021.
Other revenue decreased $1.4 million,Aerospace Products segment primarily due to a loss on butane forward purchase contracts at Repauno, partially offset by the acquisition of a majority stake in and consolidation of FYX during the second quarter.
Expenses
Comparison of the three months ended June 30, 2022 and 2021
Total expenses increased $85.3 million, primarily due to higher (i) operating expenses, (ii) interest expense, (iii) depreciation and amortization and (iv) acquisition and transaction expenses.
Operating expenses increased $52.8 million which primarily reflects:
•an increase in compensation and benefits of $12.7 million primarilycommission expenses due to the acquisition of Transtarincrease in July 2021;
•sales from the used material program as well as an increase in professional fees and other operating expenses due to the ramp-up of $21.1Aerospace Products.
Depreciation and amortization increased $4.4 million in costs of sales which primarily reflects (i)driven by an increase in the number of $13.5 million in costs associated with the sale of inventoryassets owned and on lease in the Aviation Leasing segment, and (ii) an increase of $7.8 in Corporate and Other related to the acquisition and consolidation of FYX in the second quarter; and
•an increase of $8.2 million in facility operating expense which primarily reflects (i) an increase of $6.9 million due to the acquisition of Transtar in July 2021 and (ii) an increase of $1.3 million in the Jefferson Terminal segment due to increased activity.
Interest expense increased $16.9 million, primarily due to:
•an increase of $13.9 million in Corporate and Other which reflectspartially offset by an increase in the average outstanding debtnumber of approximately $830.4aircraft redelivered and parted out into our engine leasing pool.
Management fees and incentive allocation to affiliate decreased $2.3 million due to increases in (i) the Senior Notes due 2028 of $502.3 million, (ii) the 2021 Bridge Loans of $339.8 million and (iii) the Revolving Credit Facility of $121.8 million, partially offsetdriven by a decrease in (iv) the Senior Notes due 2022 of $133.1 million, which was redeemed in full in May 2021; and
•an increase of $2.9 million at Jefferson Terminal duelower management fees allocated to the issuance of the Series 2021 Bonds in August 2021 and additional borrowings related to the EB-5 Loan Agreement.Company.
Depreciation and amortization increased $9.3 million primarily due to (i) additional assets acquired in the Aviation Leasing segment, (ii) the acquisition of Transtar in July 2021 and (ii) assets placed into service at Jefferson Terminal.
Acquisition and transaction expenses increased $5.2 million primarily due to professional fees related to strategic transactions.
Comparison of the six months ended June 30, 2022 and 2021
Total expenses increased $327.2 million, primarily due to higher (i) asset impairment charges, (ii) operating expenses, (iii) interest expense, (iv) depreciation and amortization and (v) acquisition and transaction expenses.
Asset impairment increased $121.5 million due to impairment charges related to assets held in Ukraine and Russia.
Operating expenses increased $136.7 million which primarily reflects:
•an increase in bad debt of $48 million which mainly reflects the write-off of receivables related to assets in Russia and Ukraine;
•an increase in compensation and benefits of $23.6 million primarily due to the acquisition of Transtar in July 2021;
•an increase of $23.3 million in costs associated with the sale of inventory in the Aviation Leasing segment; and
•an increase of $14.6 million in facility operating expense which primarily reflects (i) an increase of $12.1 million due to the acquisition of Transtar in July 2021, and (ii) an increase of $2.7 million in the Jefferson Terminal segment due to increased activity.
Interest expense increased $34.5 million, primarily due to:
•an increase of $26.5 million in Corporate and Other which reflects an increase in the average outstanding debt of approximately $893.3 million due to increases in (i) the Senior Notes due 2028 of $752.3 million, (ii) the 2021 Bridge Loans of $299.9 million and (iii) the Revolving Credit Facility of $107.6 million, partially offset by a decrease in (iv) the Senior Notes due 2022 of $266.1 million, which was redeemed in full in May 2021; and
•an increase of $7.8 million at Jefferson Terminal due to the issuance of the Series 2021 Bonds in August 2021 and additional borrowings related to the EB-5 Loan Agreement.
Depreciation and amortization increased $23.0 million primarily due to (i) additional assets acquired in the Aviation Leasing segment, (ii) the acquisition of Transtar in July 2021 and (ii) assets placed into service at Jefferson Terminal.
Acquisition and transaction expenses increased $9.6 million primarily due to professional fees related to strategic transactions.
Other income (expense)
Total other income increased $55.7decreased $11.3 million during three months ended JuneSeptember 30, 2022 which primarily reflects an increasea decrease of $59.7$12.7 million in gain on sale of assets, net in the Aviation Leasing segment, partially offset by an increaseand Aerospace Products segments from less opportunistic asset sales. See above discussion regarding presentation of $6.7 million in equity in losses of unconsolidated entities primarily due to unrealized losses on power swaps at Long Ridge.asset sales.
Total other income increased $45.5$64.4 million during sixnine months ended JuneSeptember 30, 2022 which primarily reflects an increase of $75.1$62.5 million in gain on sale of assets, net in the Aviation Leasing segment, partially offset by an increaseand Aerospace Products segments from opportunistic asset sales transactions. See above discussion regarding presentation of $32.1 million in equity in losses of unconsolidated entities primarily due to unrealized losses on power swaps at Long Ridge.asset sales.
Net income (loss)attributable to shareholders
Net loss decreased $46.4income increased $12.3 million for the three months ended JuneSeptember 30, 2022 and increased $148.4decreased $63.7 million for the sixnine months ended JuneSeptember 30, 2022 as compared to the same periods during the prior yearsyear primarily due to the changes noted above.
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased $97.4$19.1 million and $101.8$83.0 million during the three and sixnine months ended JuneSeptember 30, 2022, respectively, primarily due to the changes noted above.
Aviation Leasing Segment
As of JuneSeptember 30, 2022, in our Aviation Leasing segment, we own and manage 351325 aviation assets, consisting of 10796 commercial aircraft and 244229 engines, including four aircraft and two engines that were still located in Ukraine and eight aircraft and seventeen engines that were still located in Russia.
As of JuneSeptember 30, 2022, 7873 of our commercial aircraft and 135124 of our engines were leased to operators or other third parties. Aviation assets currently off lease are either undergoing repair and/or maintenance, being prepared to go on lease or held in short term storage awaiting a future lease. Our aviation equipment was approximately 73%72% utilized during the three months ended JuneSeptember 30, 2022, based on the percent of days on-lease in the quarter weighted by the monthly average equity value of our aviation leasing equipment, excluding airframes. Our aircraft currently have a weighted average remaining lease term of 4139 months, and our engines currently on-lease have an average remaining lease term of 1413 months. The table below provides additional information on the assets in our Aviation Leasing segment:
| | | | | | | | | | | | | | | | | |
Aviation Assets | Widebody | | Narrowbody | | Total |
Aircraft | | | | | |
Assets at January 1, 2022 | 13 | | | 95 | | | 108 | |
Purchases | 1 | | | 21 | | | 22 | |
Sales | (3) | | | (1) | | | (4) | |
Transfers | (2) | | | (17) | | | (19) | |
Assets at June 30, 2022 | 9 | | | 98 | | | 107 | |
| | | | | |
Engines | | | | | |
Assets at January 1, 2022 | 68 | | | 139 | | | 207 | |
Purchases | 1 | | | 36 | | | 37 | |
Sales | (10) | | | (19) | | | (29) | |
Transfers | 5 | | | 24 | | | 29 | |
Assets at June 30, 2022 | 64 | | | 180 | | | 244 | |
Aviation Leasing Assets | | Widebody | | | Narrowbody | | | Total | |
Aircraft | | | | | | | | | |
Assets at January 1, 2022 | | | 13 | | | | 95 | | | | 108 | |
Purchases | | | 1 | | | | 22 | | | | 23 | |
Sales | | | (3 | ) | | | (2 | ) | | | (5 | ) |
Transfers | | | (2 | ) | | | (28 | ) | | | (30 | ) |
Assets at September 30, 2022 | | | 9 | | | | 87 | | | | 96 | |
| | | | | | | | | | | | |
Engines | | | | | | | | | | | | |
Assets at January 1, 2022 | | | 68 | | | | 139 | | | | 207 | |
Purchases | | | 2 | | | | 43 | | | | 45 | |
Sales | | | (26 | ) | | | (24 | ) | | | (50 | ) |
Transfers | | | 5 | | | | 22 | | | | 27 | |
Assets at September 30, 2022 | | | 49 | | | | 180 | | | | 229 | |
The following table presents our results of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2022 | | 2021 | | | 2022 | | 2021 | |
| | | | | | | | | | | |
Equipment leasing revenues | | | | | | | | | | | |
Lease income | $ | 37,196 | | | $ | 40,208 | | | $ | (3,012) | | | $ | 71,043 | | | $ | 79,997 | | | $ | (8,954) | |
Maintenance revenue | 39,932 | | | 32,003 | | | 7,929 | | | 76,664 | | | 47,511 | | | 29,153 | |
Finance lease income | 102 | | | 443 | | | (341) | | | 213 | | | 846 | | | (633) | |
Other revenue | 31,701 | | | 5,789 | | | 25,912 | | | 46,036 | | | 6,190 | | | 39,846 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total revenues | 108,931 | | | 78,443 | | | 30,488 | | | 193,956 | | | 134,544 | | | 59,412 | |
| | | | | | | | | | | |
Expenses | | | | | | | | | | | |
Operating expenses | 26,226 | | | 9,145 | | | 17,081 | | | 92,428 | | | 13,395 | | | 79,033 | |
| | | | | | | | | | | |
Acquisition and transaction expenses | 919 | | | 836 | | | 83 | | | 1,949 | | | 2,032 | | | (83) | |
| | | | | | | | | | | |
Depreciation and amortization | 37,328 | | | 33,732 | | | 3,596 | | | 76,657 | | | 66,295 | | | 10,362 | |
Asset impairment | 886 | | | 89 | | | 797 | | | 123,676 | | | 2,189 | | | 121,487 | |
| | | | | | | | | | | |
Total expenses | 65,359 | | | 43,802 | | | 21,557 | | | 294,710 | | | 83,911 | | | 210,799 | |
| | | | | | | | | | | |
Other income | | | | | | | | | | | |
Equity in earnings (losses) of unconsolidated entities | 35 | | | (341) | | | 376 | | | 233 | | | (681) | | | 914 | |
Gain on sale of assets, net | 63,645 | | | 3,971 | | | 59,674 | | | 79,933 | | | 4,782 | | | 75,151 | |
Interest income | 38 | | | 357 | | | (319) | | | 203 | | | 624 | | | (421) | |
| | | | | | | | | | | |
Total other income | 63,718 | | | 3,987 | | | 59,731 | | | 80,369 | | | 4,725 | | | 75,644 | |
Income (loss) before income taxes | 107,290 | | | 38,628 | | | 68,662 | | | (20,385) | | | 55,358 | | | (75,743) | |
Provision for (benefit from) income taxes | 1,963 | | | (4) | | | 1,967 | | | 3,020 | | | (46) | | | 3,066 | |
Net income (loss) | 105,327 | | | 38,632 | | | 66,695 | | | (23,405) | | | 55,404 | | | (78,809) | |
Less: Net loss attributable to non-controlling interest in consolidated subsidiaries | — | | | — | | | — | | | — | | | — | | | — | |
Net income (loss) attributable to shareholders | $ | 105,327 | | | $ | 38,632 | | | $ | 66,695 | | | $ | (23,405) | | | $ | 55,404 | | | $ | (78,809) | |
| | Three Months Ended September 30, | | |
| | | Nine Months Ended September 30, | | |
| |
(in thousands) | | 2022 | | | 2021 | | | Change | | | 2022 | | | 2021 | | | Change | |
Revenues | | | | | | | | | | | | | | | | | | |
Lease income | | $ | 40,273 | | | $ | 40,392 | | | $ | (119 | ) | | $ | 111,316 | | | $ | 120,389 | | | $ | (9,073 | ) |
Maintenance revenue | | | 35,507 | | | | 40,252 | | | | (4,745 | ) | | | 112,171 | | | | 87,763 | | | | 24,408 | |
Finance lease income | | | 119 | | | | 439 | | | | (320 | ) | | | 332 | | | | 1,285 | | | | (953 | ) |
Asset sales revenue | | | 85,488 | | | | — | | | | 85,488 | | | | 85,488 | | | | — | | | | 85,488 | |
Other revenue | | | 3,461 | | | | 5,125 | | | | (1,664 | ) | | | 8,687 | | | | 5,761 | | | | 2,926 | |
Total revenues | | | 164,848 | | | | 86,208 | | | | 78,640 | | | | 317,994 | | | | 215,198 | | | | 102,796 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | 10,533 | | | | 7,282 | | | | 3,251 | | | | 72,135 | | | | 14,177 | | | | 57,958 | |
Cost of sales | | | 64,855 | | | | — | | | | 64,855 | | | | 64,855 | | | | — | | | | 64,855 | |
Acquisition and transaction expenses | | | 247 | | | | 234 | | | | 13 | | | | 624 | | | | 804 | | | | (180 | ) |
Depreciation and amortization | | | 32,728 | | | | 34,718 | | | | (1,990 | ) | | | 106,180 | | | | 101,992 | | | | 4,188 | |
Asset impairment | | | 4,495 | | | | 859 | | | | 3,636 | | | | 128,171 | | | | 3,048 | | | | 125,123 | |
Total expenses | | | 112,858 | | | | 43,093 | | | | 69,765 | | | | 371,965 | | | | 120,021 | | | | 251,944 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other (expense) income | | | | | | | | | | | | | | | | | | | | | | | | |
Equity in (losses) earnings of unconsolidated entities | | | (45 | ) | | | — | | | | (45 | ) | | | 753 | | | | — | | | | 753 | |
Gain on sale of assets, net | | | — | | | | 10,961 | | | | (10,961 | ) | | | 61,371 | | | | 15,751 | | | | 45,620 | |
Other income (expense) | | | 42 | | | | (1,341 | ) | | | 1,383 | | | | 245 | | | | (717 | ) | | | 962 | |
Total other (expense) income | | | (3 | ) | | | 9,620 | | | | (9,623 | ) | | | 62,369 | | | | 15,034 | | | | 47,335 | |
Income before income taxes | | | 51,987 | | | | 52,735 | | | | (748 | ) | | | 8,398 | | | | 110,211 | | | | (101,813 | ) |
Provision for income taxes | | | 1,232 | | | | 610 | | | | 622 | | | | 2,197 | | | | 1,048 | | | | 1,149 | |
Net income attributable to shareholders | | | 50,755 | | | | 52,125 | | | | (1,370 | ) | | | 6,201 | | | | 109,163 | | | | (102,962 | ) |
The following table sets forth a reconciliation of net income (loss) attributable to shareholders to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2022 | | 2021 | | | 2022 | | 2021 | |
Net income (loss) attributable to shareholders | $ | 105,327 | | | $ | 38,632 | | | $ | 66,695 | | | $ | (23,405) | | | $ | 55,404 | | | $ | (78,809) | |
Add: Provision for (benefit from) income taxes | 1,963 | | | (4) | | | 1,967 | | | 3,020 | | | (46) | | | 3,066 | |
Add: Equity-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | |
Add: Acquisition and transaction expenses | 919 | | | 836 | | | 83 | | | 1,949 | | | 2,032 | | | (83) | |
Add: Losses on the modification or extinguishment of debt and capital lease obligations | — | | | — | | | — | | | — | | | — | | | — | |
Add: Changes in fair value of non-hedge derivative instruments | — | | | — | | | — | | | — | | | — | | | — | |
Add: Asset impairment charges | 886 | | | 89 | | | 797 | | | 123,676 | | | 2,189 | | | 121,487 | |
Add: Incentive allocations | — | | | — | | | — | | | — | | | — | | | — | |
Add: Depreciation and amortization expense (1) | 49,133 | | | 40,529 | | | 8,604 | | | 100,475 | | | 81,200 | | | 19,275 | |
Add: Interest expense | — | | | — | | | — | | | — | | | — | | | — | |
Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (2) | 152 | | | (286) | | | 438 | | | 406 | | | (594) | | | 1,000 | |
Less: Equity in (earnings) losses of unconsolidated entities | (35) | | | 341 | | | (376) | | | (233) | | | 681 | | | (914) | |
Less: Non-controlling share of Adjusted EBITDA | — | | | — | | | — | | | — | | | — | | | — | |
Adjusted EBITDA (non-GAAP) | $ | 158,345 | | | $ | 80,137 | | | $ | 78,208 | | | $ | 205,888 | | | $ | 140,866 | | | $ | 65,022 | |
(1) Includes the following items for the three months ended June 30, 2022 and 2021: (i) depreciation expense of $37,328 and $33,732, (ii) lease intangible amortization of $3,310 and $1,198 and (iii) amortization for lease incentives of $8,495 and $5,599, respectively. Includes the following items for the six months ended June 30, 2022 and 2021: (i) depreciation expense of $76,657 and $66,295, (ii) lease intangible amortization of $6,968 and $1,950 and (iii) amortization for lease incentives of $16,850 and $12,955, respectively.
(2) Includes the following items for the three months ended June 30, 2022 and 2021: (i) net income (loss) of $36 and $(341) and (ii) depreciation and amortization of $116 and $55, respectively. Includes the following items for the six months ended June 30, 2022 and 2021: (i) net income (loss) of $234 and $(681) and (ii) depreciation and amortization of $172 and $87, respectively. | | Three Months Ended September 30, | | |
| | | Nine Months Ended September 30, | | |
| |
(in thousands) | | 2022 | | | 2021 | | | Change | | | 2022 | | | 2021 | | | Change | |
Net income attributable to shareholders | | $ | 50,755 | | | $ | 52,125 | | | $ | (1,370 | ) | | $ | 6,201 | | | $ | 109,163 | | | $ | (102,962 | ) |
Add: Provision for income taxes | | | 1,232 | | | | 610 | | | | 622 | | | | 2,197 | | | | 1,048 | | | | 1,149 | |
Add: Acquisition and transaction expenses | | | 247 | | | | 234 | | | | 13 | | | | 624 | | | | 804 | | | | (180 | ) |
Add: Asset impairment charges | | | 4,495 | | | | 859 | | | | 3,636 | | | | 128,171 | | | | 3,048 | | | | 125,123 | |
Add: Depreciation and amortization expense (1) | | | 39,204 | | | | 41,162 | | | | (1,958 | ) | | | 136,473 | | | | 123,341 | | | | 13,132 | |
Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (2) | | | 16 | | | | — | | | | 16 | | | | 875 | | | | — | | | | 875 | |
Less: Equity in (earnings) losses of unconsolidated entities | | | 45 | | | | — | | | | 45 | | | | (753 | ) | | | — | | | | (753 | ) |
Adjusted EBITDA (non-GAAP) | | $ | 95,994 | | | $ | 94,990 | | | $ | 1,004 | | | $ | 273,788 | | | $ | 237,404 | | | $ | 36,384 | |
(1) | Includes the following items for the three months ended September 30, 2022 and 2021: (i) depreciation expense of $32,728 and $34,718, (ii) lease intangible amortization of $3,291 and $1,266 and (iii) amortization for lease incentives of $3,185 and $5,178, respectively. Includes the following items for the nine months ended September 30, 2022 and 2021: (i) depreciation expense of $106,180 and $101,992, (ii) lease intangible amortization of $10,259 and $3,216 and (iii) amortization for lease incentives of $20,034 and $18,133, respectively. |
(2) | Includes the following items for the three and nine months ended September 30, 2022: (i) net loss of $45 and net income of $753 and (ii) depreciation and amortization of $61 and $122, respectively. |
Revenues
Comparison of the three months ended JuneSeptember 30, 2022 and 2021
Total revenue increased $30.5$78.6 million driven by higher other revenue and maintenancean increase in asset sales revenue, partially offset by lower lease income.maintenance revenue and other revenue.
•Other
Asset sales revenue increased $25.9$85.5 million primarily due to an increase in the sale of commercial aircraft and engines during 2022. See above discussion regarding presentation of asset sales.
Maintenance revenue decreased $4.7 million primarily due to the early redelivery of aircraft and lower maintenance billings related to the early termination of aircraft leases with Russian airlines as a result of the sanctions imposed on Russian airlines, partially offset by an increase in the number of aircraft and engines placed on lease and higher aircraft and engine modules, spare partsutilization.
Other revenue decreased $1.7 million primarily due to lower end-of lease redelivery compensation.
Comparison of the nine months ended September 30, 2022 and used material inventory sales;2021
•
Total revenue increased $102.8 million driven by an increase in asset sales revenue, maintenance revenue and other revenue, partially offset by a decrease in lease income.
Asset sales revenue increased $85.5 million primarily due to an increase in the sale of commercial aircraft and engines during 2022. See above discussion regarding presentation of asset sales.
Maintenance revenue increased $7.9$24.4 million primarily due to an increase in the number of aircraft and engines placed on lease, higher aircraft and engine utilization and higher end-of-lease return compensation, partially offset by a decrease in the recognition of maintenance deposits due to the early redelivery of aircraft and lower maintenance billings related to the early termination of aircraft leases with Russian airlines as a result of the sanctions imposed on Russian airlines; andairlines.
•Lease income decreased $3.0 million primarily due to the early termination of aircraft and engine leases as a result of the sanctions imposed on Russian airlines. Basic lease revenues from our owned aircraft and engines leased to Russian airlines would have been approximately $10.1 million for the three months ended June 30, 2022. This decrease is partially offset by an increase in the number of aircraft and engines placed on lease.
Comparison of the six months ended June 30, 2022 and 2021
Total revenue increased $59.4 million driven by higher other revenue and maintenance revenue, partially offset by lower lease income.
•Other revenue increased $39.8$2.9 million primarily due to an increase in engine modules, spare parts and used material inventory sales;end-of lease redelivery compensation.
•Maintenance revenue increased $29.2 million primarily due to an increase in the number of aircraft and engines placed on lease, higher aircraft and engine utilization and higher end-of-lease return compensation, partially offset by a decrease in the recognition of maintenance deposits due to the early redelivery of aircraft and lower maintenance
billings related to the early termination of aircraft leases with Russian airlines as a result of the sanctions imposed on Russian airlines; and
•Lease income decreased $9.0$9.1 million primarily due to the early termination of aircraft and engine leases as a result of the sanctions imposed on Russian airlines. Basic lease revenues from our owned aircraft and engines leased to Russian airlines would have been approximately $20.9$30.2 million for the sixnine months ended JuneSeptember 30, 2022. This decrease is partially offset by an increase in the number of aircraft and engines placed on lease.
Expenses
Comparison of the three months ended JuneSeptember 30, 2022 and 2021
Total expenses increased $21.6$69.8 million primarily due todriven by an increase in the cost of sales, asset impairment and operating expenses, andpartially offset by a decrease in depreciation and amortization expense.
•Operating expenses
Cost of sales increased $17.1$64.9 million primarily as a result of an increase in costs associated withasset sales and the salegross presentation of engine modules, spare partsasset sales revenues and used material inventory and increasesrelated cost of sales as described above.
Asset impairment increased $3.6 million for the adjustment of the carrying value of leasing equipment to fair value. See Note 3 to the consolidated financial statements for additional information.
Operating expenses increased $3.3 million primarily as a result of an increase in insurance expense, shipping and storage fees, professional fees and other operating expenses.expenses, partially offset by a decrease in provision for credit losses.
•
Depreciation and amortization expense decreased $2.0 million driven by an increase in the number of aircraft redelivered and parted out into our engine leasing pool.
Comparison of the nine months ended September 30, 2022 and 2021
Total expenses increased $251.9 million primarily driven by an increase in asset impairment, cost of sales, operating expenses and depreciation and amortization expense.
Asset impairment increased $125.1 million primarily due to the write down of aircraft and engines located in Ukraine and Russia that may not be recoverable. See Note 3 to the consolidated financial statements for additional information.
Cost of sales increased $64.9 million primarily as a result of an increase in asset sales and the gross presentation of asset sales revenues and related costs of sales as described above.
Operating expenses increased $58.0 million primarily as a result of an increase in provision for credit losses as a result of the sanctions imposed on Russian airlines, an increase in insurance expense, shipping and storage fees, professional fees, and repairs and maintenance expenses.
Depreciation and amortization expense increased $3.6$4.2 million driven by an increase in the number of assets owned and on lease, partially offset by an increase in the number of aircraft redelivered and parted out into our engine leasing pool.
Comparison of the six months ended June 30, 2022 and 2021
Total expenses increased $210.8 million primarily due to an increase in asset impairment expense, operating expenses and depreciation and amortization expense.
•Asset impairment increased $121.5 million for the adjustment of the carrying value of leasing equipment to fair value, primarily due to the write down of aircraft and engines located in Ukraine and Russia that may not be recoverable. See Note 3 to the consolidated financial statements for additional information;
•Operating expenses increased $79.0 million primarily as a result of an increase in bad debt expense as a result of the sanctions imposed on Russian airlines, an increase in costs associated with the sale of engine modules, spare parts and used material inventory and increases in shipping and storage fees, professional fees, repairs and maintenance fees and other operating expenses; and
•Depreciation and amortization expense increased $10.4 million driven by an increase in the number of assets owned and on lease, partially offset by an increase in the number of aircraft redelivered and parted out into our engine leasing pool.
Other income (expense)
Total other income increased $59.7decreased $9.6 million during the three months ended JuneSeptember 30, 2022 primarily due to a decrease of $11.0 million in gain on sale of assets, net. See above discussion regarding presentation of asset sales.
Total other income increased $47.3 million during the nine months ended September 30, 2022 primarily due to (i) an increase of $59.7$45.6 million in gain on the sale of leasing equipment in 2022.
Total other income increased $75.6 million during the six months ended June 30, 2022 primarilyassets, net due to more opportunistic sales transactions and (ii) an increase of $75.2$0.8 million in gain on the sale of leasing equipment in 2022 and an increase of $0.9 million in Aviation Leasing’sour proportionate share of unconsolidated entities’ net income.
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased $78.2$1.0 million and $65.0$36.4 million during the three and sixnine months ended JuneSeptember 30, 2022, respectively, primarily due to the changes noted above.
Aerospace Products Segment
Jefferson Terminal SegmentThe Aerospace Products segment develops, manufactures, repairs, and sells aircraft engines and aftermarket components primarily for the CFM56-7B and CFM56-5B commercial aircraft engines. Our engine and module sales are facilitated through The Module Factory, a dedicated commercial maintenance center designed to focus on modular repair and refurbishment of CFM56-7B and CFM56-5B engines. Used serviceable material is sold through our exclusive partnership with AAR Corp, who is responsible for the teardown, repair, marketing and sales of spare parts from our CFM56 engine pool. We also hold a 25% interest in the Advanced Engine Repair JV which focuses on developing new cost savings programs for engine repairs.
The following table presents our results of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2022 | | 2021 | | | 2022 | | 2021 | |
| | | | | | | | | | | |
Infrastructure revenues | | | | | | | | | | | |
Lease income | $ | 314 | | | $ | 432 | | | $ | (118) | | | $ | 666 | | | $ | 862 | | | $ | (196) | |
Terminal services revenues | 14,214 | | | 11,095 | | | 3,119 | | | 26,908 | | | 21,384 | | | 5,524 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total revenues | 14,528 | | | 11,527 | | | 3,001 | | | 27,574 | | | 22,246 | | | 5,328 | |
| | | | | | | | | | | |
Expenses | | | | | | | | | | | |
Operating expenses | 14,261 | | | 11,777 | | | 2,484 | | | 27,384 | | | 23,498 | | | 3,886 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Depreciation and amortization | 9,739 | | | 9,315 | | | 424 | | | 19,439 | | | 17,033 | | | 2,406 | |
Interest expense | 6,127 | | | 3,213 | | | 2,914 | | | 12,237 | | | 4,416 | | | 7,821 | |
Total expenses | 30,127 | | | 24,305 | | | 5,822 | | | 59,060 | | | 44,947 | | | 14,113 | |
| | | | | | | | | | | |
Other expense | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other expense | (1,291) | | | (886) | | | (405) | | | (1,390) | | | (705) | | | (685) | |
Total other expense | (1,291) | | | (886) | | | (405) | | | (1,390) | | | (705) | | | (685) | |
Loss before income taxes | (16,890) | | | (13,664) | | | (3,226) | | | (32,876) | | | (23,406) | | | (9,470) | |
Provision for income taxes | 68 | | | 59 | | | 9 | | | 137 | | | 116 | | | 21 | |
Net loss | (16,958) | | | (13,723) | | | (3,235) | | | (33,013) | | | (23,522) | | | (9,491) | |
Less: Net loss attributable to non-controlling interest in consolidated subsidiaries | (8,135) | | | (6,538) | | | (1,597) | | | (15,271) | | | (11,554) | | | (3,717) | |
Net loss attributable to shareholders | $ | (8,823) | | | $ | (7,185) | | | $ | (1,638) | | | $ | (17,742) | | | $ | (11,968) | | | $ | (5,774) | |
| | Three Months Ended September 30, | | |
| | | Nine Months Ended September 30, | | |
| |
(in thousands) | | 2022 | | | 2021 | | | Change | | | 2022 | | | 2021 | | | Change | |
Aerospace products revenue | | $ | 53,401 | | | $ | 7,730 | | | $ | 45,671 | | | $ | 94,211 | | | $ | 13,284 | | | $ | 80,927 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | 3,491 | | | | 1,774 | | | | 1,717 | | | | 8,094 | | | | 3,519 | | | | 4,575 | |
Cost of sales | | | 31,093 | | | | 5,367 | | | | 25,726 | | | | 55,284 | | | | 8,577 | | | | 46,707 | |
Acquisition and transaction expenses | | | 15 | | | | — | | | | 15 | | | | 15 | | | | — | | | | 15 | |
Depreciation and amortization | | | 77 | | | | 40 | | | | 37 | | | | 178 | | | | 40 | | | | 138 | |
Total expenses | | | 34,676 | | | | 7,181 | | | | 27,495 | | | | 63,571 | | | | 12,136 | | | | 51,435 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other (expense) income | | | | | | | | | | | | | | | | | | | | | | | | |
Equity in losses of unconsolidated entities | | | (313 | ) | | | (369 | ) | | | 56 | | | | (878 | ) | | | (1,050 | ) | | | 172 | |
Gain on sale of assets, net | | | — | | | | 1,724 | | | | (1,724 | ) | | | 18,562 | | | | 1,716 | | | | 16,846 | |
Total other (expense) income | | | (313 | ) | | | 1,355 | | | | (1,668 | ) | | | 17,684 | | | | 666 | | | | 17,018 | |
Income before income taxes | | | 18,412 | | | | 1,904 | | | | 16,508 | | | | 48,324 | | | | 1,814 | | | | 46,510 | |
Provision for (benefit from) income taxes | | | 2,586 | | | | (110 | ) | | | 2,696 | | | | 5,055 | | | | (11 | ) | | | 5,066 | |
Net income attributable to shareholders | | | 15,826 | | | | 2,014 | | | | 13,812 | | | | 43,269 | | | | 1,825 | | | | 41,444 | |
The following table sets forth a reconciliation of net loss attributable to shareholders to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2022 | | 2021 | | | 2022 | | 2021 | |
Net loss attributable to shareholders | $ | (8,823) | | | $ | (7,185) | | | $ | (1,638) | | | $ | (17,742) | | | $ | (11,968) | | | $ | (5,774) | |
Add: Provision for income taxes | 68 | | | 59 | | | 9 | | | 137 | | | 116 | | | 21 | |
Add: Equity-based compensation expense | 538 | | | 1,270 | | | (732) | | | 1,076 | | | 2,111 | | | (1,035) | |
Add: Acquisition and transaction expenses | — | | | — | | | — | | | — | | | — | | | — | |
Add: Losses on the modification or extinguishment of debt and capital lease obligations | — | | | — | | | — | | | — | | | — | | | — | |
Add: Changes in fair value of non-hedge derivative instruments | — | | | — | | | — | | | — | | | — | | | — | |
Add: Asset impairment charges | — | | | — | | | — | | | — | | | — | | | — | |
Add: Incentive allocations | — | | | — | | | — | | | — | | | — | | | — | |
Add: Depreciation and amortization expense | 9,739 | | | 9,315 | | | 424 | | | 19,439 | | | 17,033 | | | 2,406 | |
Add: Interest expense | 6,127 | | | 3,213 | | | 2,914 | | | 12,237 | | | 4,416 | | | 7,821 | |
Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities | — | | | — | | | — | | | — | | | — | | | — | |
Less: Equity in earnings of unconsolidated entities | — | | | — | | | — | | | — | | | — | | | — | |
Less: Non-controlling share of Adjusted EBITDA (1) | (3,491) | | | (3,117) | | | (374) | | | (7,183) | | | (5,325) | | | (1,858) | |
Adjusted EBITDA (non-GAAP) | $ | 4,158 | | | $ | 3,555 | | | $ | 603 | | | $ | 7,964 | | | $ | 6,383 | | | $ | 1,581 | |
(1) Includes the following items for the three months ended June 30, 2022 and 2021: (i) equity-based compensation of $115 and $286, (ii) provision for income taxes of $14 and $13, (iii) interest expense of $1,299 and $722 and (iv) depreciation and amortization expense of $2,063 and $2,096, respectively. Includes the following items for the six months ended June 30, 2022 and 2021: (i) equity-based compensation of $235 and $475, (ii) provision for income taxes of $30 and $26, (iii) interest expense of $2,673 and $993 and (iv) depreciation and amortization expense of $4,245 and $3,831, respectively.
Revenues
Total revenues increased $3.0 million during the three months ended June 30, 2022 which reflects an increase in terminal services revenue of $3.1 million primarily due to higher volumes.
Total revenues increased $5.3 million during the six months ended June 30, 2022 which reflects an increase in terminal services revenue of $5.5 million primarily due to higher volumes.
Expenses
Total expenses increased $5.8 million during the three months ended June 30, 2022, which reflects:
•an increase in interest expense of $2.9 million due to the issuance of the Series 2021 Bonds in August 2021 and additional borrowings related to the EB-5 Loan Agreement;
•an increase in operating expenses of $2.5 million primarily due to increased terminal activity; and
•an increase in depreciation and amortization of $0.4 million due to additional assets being placed into service.
Total expenses increased $14.1 million during the six months ended June 30, 2022, which reflects:
•an increase in interest expense of $7.8 million due to the issuance of the Series 2021 Bonds in August 2021 and additional borrowings related to the EB-5 Loan Agreement;
•an increase in operating expenses of $3.9 million primarily due to increased terminal activity; and
•an increase in depreciation and amortization of $2.4 million due to additional assets being placed into service.
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased $0.6 million and $1.6 million during the three and six months endedJune 30, 2022, respectively, primarily due to the changes noted above.
Ports and Terminals
The following table presents our results of operations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2022 | | 2021 | | | 2022 | | 2021 | |
Revenues | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Rail revenues | $ | — | | | $ | — | | | $ | — | | | $ | 86 | | | $ | — | | | $ | 86 | |
Terminal services revenues | 13 | | | 25 | | | (12) | | | 103 | | | 157 | | | (54) | |
Other revenue | 1,627 | | | 2,319 | | | (692) | | | (535) | | | 10,283 | | | (10,818) | |
| | | | | | | | | | | |
Total revenues | 1,640 | | | 2,344 | | | (704) | | | (346) | | | 10,440 | | | (10,786) | |
| | | | | | | | | | | |
Expenses | | | | | | | | | | | |
Operating expenses | 4,283 | | | 3,828 | | | 455 | | | 8,166 | | | 6,930 | | | 1,236 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Depreciation and amortization | 2,376 | | | 2,216 | | | 160 | | | 4,745 | | | 4,427 | | | 318 | |
| | | | | | | | | | | |
Interest expense | 342 | | | 295 | | | 47 | | | 629 | | | 574 | | | 55 | |
Total expenses | 7,001 | | | 6,339 | | | 662 | | | 13,540 | | | 11,931 | | | 1,609 | |
| | | | | | | | | | | |
Other expense | | | | | | | | | | | |
Equity in losses of unconsolidated entities | (12,971) | | | (7,015) | | | (5,956) | | | (36,520) | | | (5,473) | | | (31,047) | |
Gain on sale of equipment, net | — | | | 16 | | | (16) | | | — | | | 16 | | | (16) | |
Interest income | — | | | 91 | | | (91) | | | — | | | 91 | | | (91) | |
| | | | | | | | | | | |
Total other expense | (12,971) | | | (6,908) | | | (6,063) | | | (36,520) | | | (5,366) | | | (31,154) | |
Loss before income taxes | (18,332) | | | (10,903) | | | (7,429) | | | (50,406) | | | (6,857) | | | (43,549) | |
Benefit from income taxes | — | | | (1,621) | | | 1,621 | | | — | | | (1,467) | | | 1,467 | |
Net loss | (18,332) | | | (9,282) | | | (9,050) | | | (50,406) | | | (5,390) | | | (45,016) | |
Less: Net loss attributable to non-controlling interest in consolidated subsidiaries | (320) | | | (87) | | | (233) | | | (650) | | | (32) | | | (618) | |
Net loss attributable to shareholders | $ | (18,012) | | | $ | (9,195) | | | $ | (8,817) | | | $ | (49,756) | | | $ | (5,358) | | | $ | (44,398) | |
The following table sets forth a reconciliation of net loss attributable to shareholders to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2022 | | 2021 | | | 2022 | | 2021 | |
Net loss attributable to shareholders | $ | (18,012) | | | $ | (9,195) | | | $ | (8,817) | | | $ | (49,756) | | | $ | (5,358) | | | $ | (44,398) | |
Add: Benefit from income taxes | — | | | (1,621) | | | 1,621 | | | — | | | (1,467) | | | 1,467 | |
Add: Equity-based compensation expense | 150 | | | 169 | | | (19) | | | 321 | | | 442 | | | (121) | |
Add: Acquisition and transaction expenses | — | | | — | | | — | | | — | | | — | | | — | |
Add: Losses on the modification or extinguishment of debt and capital lease obligations | — | | | — | | | — | | | — | | | — | | | — | |
Add: Changes in fair value of non-hedge derivative instruments | (1,514) | | | 1,391 | | | (2,905) | | | (748) | | | (6,573) | | | 5,825 | |
Add: Asset impairment charges | — | | | — | | | — | | | — | | | — | | | — | |
Add: Incentive allocations | — | | | — | | | — | | | — | | | — | | | — | |
Add: Depreciation and amortization expense | 2,376 | | | 2,216 | | | 160 | | | 4,745 | | | 4,427 | | | 318 | |
Add: Interest expense | 342 | | | 295 | | | 47 | | | 629 | | | 574 | | | 55 | |
Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (1) | 7,472 | | | 246 | | | 7,226 | | | 13,567 | | | 2,951 | | | 10,616 | |
Less: Equity in losses of unconsolidated entities | 12,971 | | | 7,015 | | | 5,956 | | | 36,520 | | | 5,473 | | | 31,047 | |
Less: Non-controlling share of Adjusted EBITDA (2) | (110) | | | (140) | | | 30 | | | (234) | | | 39 | | | (273) | |
Adjusted EBITDA (non-GAAP) | $ | 3,675 | | | $ | 376 | | | $ | 3,299 | | | $ | 5,044 | | | $ | 508 | | | $ | 4,536 | |
(1) Includes the following items for the three months ended June 30, 2022 and 2021: (i) net (loss) of $(12,972) and $(7,015), (ii) interest expense of $6,604 and $314, (iii) depreciation and amortization expense of $6,240 and $1,845, (iv) acquisition and transaction expenses of $387 and $—, (v) changes in fair value of non-hedge derivative instruments of $7,118 and $5,078, (vi) equity-based compensation of $95 and $—, and (vii) asset impairment of $— and $24, respectively. Includes the following items for the six months ended June 30, 2022 and 2021: (i) net loss of $(34,352) and $(5,473), (ii) interest expense of $13,047 and $474, (iii) depreciation and amortization expense of $12,524 and $3,725, (iv) acquisition and transaction expenses of $391 and $—, (v) changes in fair value of non-hedge derivative instruments of $21,732 and $4,201, (vi) equity-based compensation of $193 and $— and (vii) asset impairment of $32 and $24, respectively.
(2) Includes the following items for the three months ended June 30, 2022 and 2021: (i) equity-based compensation of $9 and $6, (ii) interest expense of $20 and $10, (iii) depreciation and amortization expense of $143 and $76 and (iv) changes in fair value of non-hedge derivative instruments of $(62) and $48, respectively. Includes the following items for the six months ended June 30, 2022 and 2021: (i) equity-based compensation of $15 and $15, (ii) interest expense of $30 and $20, (iii) depreciation and amortization expense of $225 and $152 and (iv) changes in fair value of non-hedge derivative instruments of $(36) and $(226), respectively.
Revenues
Total revenue decreased $0.7 million during the three months ended June 30, 2022primarily due to a loss on butane forward purchase contracts at Repauno.
Total revenue decreased $10.8 million during the six months ended June 30, 2022primarily due to a loss on butane forward purchase contracts at Repauno.
Expenses
Total expenses increased $0.7 million during the three months ended June 30, 2022 which reflects (i) higher operating expenses of $0.5 million due to increased activity at Repauno and (ii) higher depreciation and amortization of $0.2 million due to additional assets placed into service at Repauno.
Total expenses increased $1.6 million during the six months ended June 30, 2022 which reflects (i) higher operating expenses of $1.2 million due to increased activity at Repauno and (ii) higher depreciation and amortization of $0.3 million due to additional assets placed into service at Repauno.
Other expense
Total other expense increased $6.1 million and $31.2 million during the three and six months endedJune 30, 2022, respectively, which reflects an increase in equity method losses from unconsolidated entities primarily due to unrealized and realized losses on power swaps at Long Ridge.
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased $3.3 million and $4.5 million during the three and six months endedJune 30, 2022, respectively, primarily due to the changes noted above.
Transtar
The following table presents our results of operations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2022 | | 2021 | | | 2022 | | 2021 | |
| | | | | | | | | | | |
Infrastructure revenues | | | | | | | | | | | |
Lease income | $ | 553 | | | $ | — | | | $ | 553 | | | $ | 1,041 | | | $ | — | | | $ | 1,041 | |
Rail revenues | 37,507 | | | — | | | 37,507 | | | 71,089 | | | — | | | 71,089 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total revenues | 38,060 | | | — | | | 38,060 | | | 72,130 | | | — | | | 72,130 | |
| | | | | | | | | | | |
Expenses | | | | | | | | | | | |
Operating expenses | 19,826 | | | — | | | 19,826 | | | 38,889 | | | — | | | 38,889 | |
| | | | | | | | | | | |
Acquisition and transaction expenses | 149 | | | — | | | 149 | | | 355 | | | — | | | 355 | |
| | | | | | | | | | | |
Depreciation and amortization | 4,696 | | | — | | | 4,696 | | | 9,455 | | | — | | | 9,455 | |
| | | | | | | | | | | |
Interest expense | 15 | | | — | | | 15 | | | 75 | | | — | | | 75 | |
Total expenses | 24,686 | | | — | | | 24,686 | | | 48,774 | | | — | | | 48,774 | |
| | | | | | | | | | | |
Other expense | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other expense | (305) | | | — | | | (305) | | | (665) | | | — | | | (665) | |
Total other expense | (305) | | | — | | | (305) | | | (665) | | | — | | | (665) | |
Income before income taxes | 13,069 | | | — | | | 13,069 | | | 22,691 | | | — | | | 22,691 | |
Provision for income taxes | 2,217 | | | — | | | 2,217 | | | 4,296 | | | — | | | 4,296 | |
Net income | 10,852 | | | — | | | 10,852 | | | 18,395 | | | — | | | 18,395 | |
Less: Net income attributable to non-controlling interest in consolidated subsidiaries | — | | | — | | | — | | | — | | | — | | | — | |
Net income attributable to shareholders | $ | 10,852 | | | $ | — | | | $ | 10,852 | | | $ | 18,395 | | | $ | — | | | $ | 18,395 | |
The following table sets forth a reconciliation of net income attributable to shareholders to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2022 | | 2021 | | | 2022 | | 2021 | |
Net income attributable to shareholders | $ | 10,852 | | | $ | — | | | $ | 10,852 | | | $ | 18,395 | | | $ | — | | | $ | 18,395 | |
Add: Provision for income taxes | 2,217 | | | — | | | 2,217 | | | 4,296 | | | — | | | 4,296 | |
Add: Equity-based compensation expense | 897 | | | — | | | 897 | | | 897 | | | — | | | 897 | |
Add: Acquisition and transaction expenses | 149 | | | — | | | 149 | | | 355 | | | — | | | 355 | |
Add: Losses on the modification or extinguishment of debt and capital lease obligations | — | | | — | | | — | | | — | | | — | | | — | |
Add: Changes in fair value of non-hedge derivative instruments | — | | | — | | | — | | | — | | | — | | | — | |
Add: Asset impairment charges | — | | | — | | | — | | | — | | | — | | | — | |
Add: Incentive allocations | — | | | — | | | — | | | — | | | — | | | — | |
Add: Depreciation and amortization expense | 4,696 | | | — | | | 4,696 | | | 9,455 | | | — | | | 9,455 | |
Add: Interest expense | 15 | | | — | | | 15 | | | 75 | | | — | | | 75 | |
Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities | — | | | — | | | — | | | — | | | — | | | — | |
Less: Equity in earnings of unconsolidated entities | — | | | — | | | — | | | — | | | — | | | — | |
Less: Non-controlling share of Adjusted EBITDA | — | | | — | | | — | | | — | | | — | | | — | |
Adjusted EBITDA | $ | 18,826 | | | $ | — | | | $ | 18,826 | | | $ | 33,473 | | | $ | — | | | $ | 33,473 | |
| | Three Months Ended September 30, | | |
| | | Nine Months Ended September 30, | | |
| |
(in thousands) | | 2022 | | | 2021 | | | Change | | | 2022 | | | 2021 | | | Change | |
Net income attributable to shareholders | | $ | 15,826 | | | $ | 2,014 | | | $ | 13,812 | | | $ | 43,269 | | | $ | 1,825 | | | $ | 41,444 | |
Add: Provision for (benefit from) income taxes | | | 2,586 | | | | (110 | ) | | | 2,696 | | | | 5,055 | | | | (11 | ) | | | 5,066 | |
Add: Acquisition and transaction expenses | | | 15 | | | | — | | | | 15 | | | | 15 | | | | — | | | | 15 | |
Add: Depreciation and amortization expense | | | 77 | | | | 40 | | | | 37 | | | | 178 | | | | 40 | | | | 138 | |
Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (1) | | | (257 | ) | | | (312 | ) | | | 55 | | | | (710 | ) | | | (906 | ) | | | 196 | |
Less: Equity in losses of unconsolidated entities | | | 313 | | | | 369 | | | | (56 | ) | | | 878 | | | | 1,050 | | | | (172 | ) |
Adjusted EBITDA (non-GAAP) | | $ | 18,560 | | | $ | 2,001 | | | $ | 16,559 | | | $ | 48,685 | | | $ | 1,998 | | | $ | 46,687 | |
58
(1) | Includes the following items for the three months ended September 30, 2022 and 2021: (i) net loss of $313 and $369 and (ii) depreciation and amortization of $56 and $57, respectively. Includes the following items for the nine months ended September 30, 2022 and 2021: (i) net loss of $878 and $1,050 and (ii) depreciation and amortization of $168 and $144, respectively. |
Financial results forComparison of the three and sixnine months ended JuneSeptember 30, 2022 and 2021
Revenues
Total revenues were $38.1Aerospace Products revenue increased $45.7 million and $72.1 million for during the three and six months endedJune September 30, 2022 respectively, which primarily consistsdriven by an increase in sales relating to the CFM56-7B and CFM56-5B engines, engine modules, spare parts and used material inventory as operations continue to ramp-up in 2022. See above discussion regarding presentation of switching, interline,asset sales.
Total Aerospace Products revenue increased $80.9 million during the nine months ended September 30, 2022 driven by an increase in sales relating to the CFM56-7B and ancillary rail services.CFM56-5B engines, engine modules, spare parts and used material inventory as operations continue to ramp-up in 2022. See above discussion regarding presentation of asset sales.
Expenses
Comparison of the three months ended September 30, 2022 and 2021
Total expenses were $24.7increased $27.5 million primarily due to an increase in costs of sales and operating expenses.
Cost of sales increased $25.7 million primarily as a result of an increase in Aerospace product revenues and the gross presentation described above.
Operating expenses increased $1.7 million primarily due to an increase in commission expenses due to the increase in sales from the used material program as well as an increase in professional fees and other operating expenses due to the ramp-up of Aerospace Products.
Comparison of the nine months ended September 30, 2022 and 2021
Total expenses increased $51.4 million primarily due to an increase in costs of sales and operating expenses.
Cost of sales increased $46.7 million primarily as a result of an increase in Aerospace product revenues and the gross presentation described above.
Operating expenses increased $4.6 million primarily due to an increase in commission expenses due to the increase in sales from the used material program as well as an increase in professional fees and other operating expenses due to the ramp-up of Aerospace Products.
Other income (expense)
Total other income decreased $1.7 million during three months ended September 30, 2022 which primarily reflects a decrease of $1.7 million in gain on sale of assets, net. See above discussion regarding presentation of asset sales.
Total other income increased $17.0 million during nine months ended September 30, 2022 which primarily reflects an increase of $16.8 million in gain on sale of assets, net due to an increase in sales relating to the CFM56-7B and CFM56-5B engines as operations continue to ramp-up in 2022.
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased $16.6 million and $48.8$46.7 million during the three and sixnine months endedJune 30, 2022, respectively. Expenses primarily consist of (i) operating expenses of $19.8 million and $38.9 million during the three and six months endedJune 30, 2022, respectively, comprised of mostly compensation and benefits of $11.8 million and $23.6 million, respectively, and facility operating expense of $6.9 million and $12.1 million, respectively, and (ii) depreciation and amortization of $4.7 million and $9.5 million, respectively.
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA was $18.8 million and $33.5 million during the three and six months endedJune September 30, 2022, respectively, primarily due to the activitychanges noted above.
Corporate and Other
The following table presents our results of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2022 | | 2021 | | | 2022 | | 2021 | |
Revenues | | | | | | | | | | | |
Equipment leasing revenues | | | | | | | | | | | |
Lease income | $ | 2,342 | | | $ | 2,694 | | | $ | (352) | | | $ | 7,709 | | | $ | 3,132 | | | $ | 4,577 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other revenue | 791 | | | 434 | | | 357 | | | 2,090 | | | 502 | | | 1,588 | |
Total equipment leasing revenues | 3,133 | | | 3,128 | | | 5 | | | 9,799 | | | 3,634 | | | 6,165 | |
Infrastructure revenues | | | | | | | | | | | |
Other revenue | 11,640 | | | 1,473 | | | 10,167 | | | 12,658 | | | 3,200 | | | 9,458 | |
Total infrastructure revenues | 11,640 | | | 1,473 | | | 10,167 | | | 12,658 | | | 3,200 | | | 9,458 | |
Total revenues | 14,773 | | | 4,601 | | | 10,172 | | | 22,457 | | | 6,834 | | | 15,623 | |
| | | | | | | | | | | |
Expenses | | | | | | | | | | | |
Operating expenses | 19,408 | | | 6,433 | | | 12,975 | | | 26,053 | | | 12,357 | | | 13,696 | |
General and administrative | 5,004 | | | 3,655 | | | 1,349 | | | 10,695 | | | 7,907 | | | 2,788 | |
Acquisition and transaction expenses | 8,558 | | | 3,563 | | | 4,995 | | | 13,346 | | | 4,010 | | | 9,336 | |
Management fees and incentive allocation to affiliate | 3,062 | | | 4,113 | | | (1,051) | | | 7,226 | | | 8,103 | | | (877) | |
Depreciation and amortization | 2,483 | | | 2,108 | | | 375 | | | 4,627 | | | 4,151 | | | 476 | |
Interest expense | 47,889 | | | 33,996 | | | 13,893 | | | 92,030 | | | 65,504 | | | 26,526 | |
Total expenses | 86,404 | | | 53,868 | | | 32,536 | | | 153,977 | | | 102,032 | | | 51,945 | |
| | | | | | | | | | | |
Other (expense) income | | | | | | | | | | | |
Equity in (losses) earnings of unconsolidated entities | (887) | | | 204 | | | (1,091) | | | (1,549) | | | 376 | | | (1,925) | |
| | | | | | | | | | | |
Loss on extinguishment of debt | — | | | (3,254) | | | 3,254 | | | — | | | (3,254) | | | 3,254 | |
Interest income | 552 | | | 6 | | | 546 | | | 1,043 | | | 24 | | | 1,019 | |
Other (expense) income | — | | | 2 | | | (2) | | | — | | | 2 | | | (2) | |
Total other expense | (335) | | | (3,042) | | | 2,707 | | | (506) | | | (2,852) | | | 2,346 | |
Loss before income taxes | (71,966) | | | (52,309) | | | (19,657) | | | (132,026) | | | (98,050) | | | (33,976) | |
Benefit from income taxes | (837) | | | (74) | | | (763) | | | (556) | | | (74) | | | (482) | |
Net loss | (71,129) | | | (52,235) | | | (18,894) | | | (131,470) | | | (97,976) | | | (33,494) | |
Less: Net loss attributable to non-controlling interest in consolidated subsidiaries | (25) | | | — | | | (25) | | | (25) | | | — | | | (25) | |
Less: Dividends on preferred shares | 6,791 | | | 6,551 | | | 240 | | | 13,582 | | | 11,176 | | | 2,406 | |
Net loss attributable to shareholders | $ | (77,895) | | | $ | (58,786) | | | $ | (19,109) | | | $ | (145,027) | | | $ | (109,152) | | | $ | (35,875) | |
| | Three Months Ended September 30, | | |
| | | Nine Months Ended September 30, | | |
| |
(in thousands) | | 2022 | | | 2021 | | | Change | | | 2022 | | | 2021 | | | Change | |
Revenues | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | 588 | | | | 1,074 | | | | (486 | ) | | | 3,422 | | | | 2,945 | | | | 477 | |
General and administrative | | | 3,354 | | | | 2,862 | | | | 492 | | | | 9,125 | | | | 7,166 | | | | 1,959 | |
Acquisition and transaction expenses | | | 2,586 | | | | 898 | | | | 1,688 | | | | 4,810 | | | | 2,906 | | | | 1,904 | |
Management fees and incentive allocation to affiliate | | | 539 | | | | 2,116 | | | | (1,577 | ) | | | 4,692 | | | | 7,027 | | | | (2,335 | ) |
Depreciation and amortization | | | 72 | | | | 67 | | | | 5 | | | | 209 | | | | 162 | | | | 47 | |
Interest expense | | | 644 | | | | 584 | | | | 60 | | | | 1,910 | | | | 1,734 | | | | 176 | |
Total expenses | | | 7,783 | | | | 7,601 | | | | 182 | | | | 24,168 | | | | 21,940 | | | | 2,228 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss before income taxes | | | (7,783 | ) | | | (7,601 | ) | | | (182 | ) | | | (24,168 | ) | | | (21,940 | ) | | | (2,228 | ) |
Provision for (benefit from) income taxes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Net loss attributable to shareholders | | | (7,783 | ) | | | (7,601 | ) | | | (182 | ) | | | (24,168 | ) | | | (21,940 | ) | | | (2,228 | ) |
The following table sets forth a reconciliation of net loss attributable to shareholders to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
(in thousands) | 2022 | | 2021 | | | 2022 | | 2021 | |
Net loss attributable to shareholders | $ | (77,895) | | | $ | (58,786) | | | $ | (19,109) | | | $ | (145,027) | | | $ | (109,152) | | | $ | (35,875) | |
Add: Benefit from income taxes | (837) | | | (74) | | | (763) | | | (556) | | | (74) | | | (482) | |
Add: Equity-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | |
Add: Acquisition and transaction expenses | 8,558 | | | 3,563 | | | 4,995 | | | 13,346 | | | 4,010 | | | 9,336 | |
Add: Losses on the modification or extinguishment of debt and capital lease obligations | — | | | 3,254 | | | (3,254) | | | — | | | 3,254 | | | (3,254) | |
Add: Changes in fair value of non-hedge derivative instruments | — | | | — | | | — | | | — | | | — | | | — | |
Add: Asset impairment charges | — | | | — | | | — | | | — | | | — | | | — | |
Add: Incentive allocations | — | | | — | | | — | | | — | | | — | | | — | |
Add: Depreciation and amortization expense | 2,483 | | | 2,108 | | | 375 | | | 4,627 | | | 4,151 | | | 476 | |
Add: Interest expense | 47,889 | | | 33,996 | | | 13,893 | | | 92,030 | | | 65,504 | | | 26,526 | |
Add: Pro-rata share of Adjusted EBITDA from unconsolidated entities (1) | (647) | | | 29 | | | (676) | | | (1,335) | | | 34 | | | (1,369) | |
Less: Equity in losses (earnings) of unconsolidated entities | 887 | | | (204) | | | 1,091 | | | 1,549 | | | (376) | | | 1,925 | |
Less: Non-controlling share of Adjusted EBITDA (2) | (115) | | | — | | | (115) | | | (115) | | | — | | | (115) | |
Adjusted EBITDA (non-GAAP) | $ | (19,677) | | | $ | (16,114) | | | $ | (3,563) | | | $ | (35,481) | | | $ | (32,649) | | | $ | (2,832) | |
| | Three Months Ended September 30, | | |
| | | Nine Months Ended September 30, | | |
| |
(in thousands) | | 2022 | | | 2021 | | | Change | | | 2022 | | | 2021 | | | Change | |
Net loss attributable to shareholders | | $ | (7,783 | ) | | $ | (7,601 | ) | | $ | (182 | ) | | $ | (24,168 | ) | | $ | (21,940 | ) | | $ | (2,228 | ) |
Add: Acquisition and transaction expenses | | | 2,586 | | | | 898 | | | | 1,688 | | | | 4,810 | | | | 2,906 | | | | 1,904 | |
Add: Depreciation and amortization expense | | | 72 | | | | 67 | | | | 5 | | | | 209 | | | | 162 | | | | 47 | |
Add: Interest expense | | | 644 | | | | 584 | | | | 60 | | | | 1,910 | | | | 1,734 | | | | 176 | |
Adjusted EBITDA (non-GAAP) | | $ | (4,481 | ) | | $ | (6,052 | ) | | $ | 1,571 | | | $ | (17,239 | ) | | $ | (17,138 | ) | | $ | (101 | ) |
(1) Includes the following items for the three months ended June 30, 2022 and 2021: (i) net (loss) income of $(947) and $3, (ii) interest expense of $191 and $26 and (iii) depreciation and amortization expense of $109 and $—, respectively. Includes the following items for the six months ended June 30, 2022 and 2021: (i) net loss of $(1,655) and $(19), (ii) interest expense of $211 and $53 and (iii) depreciation and amortization expense of $109 and $—, respectively.
(2) Includes the following items for the three months ended June 30, 2022 and 2021: depreciation and amortization expense of $115 and $— respectively. Includes the following items for the six months ended June 30, 2022 and 2021: depreciation and amortization expense of $115 and $—, respectively.
Revenues
Total revenues increased $10.2 million during the three months ended June 30, 2022 primarily due to an increase of $10.2 million in the other revenues from the acquisition of a majority interest in and consolidation of FYX during the second quarter of 2022.
Total revenues increased $15.6 million during the six months ended June 30, 2022 primarily due to (i) an increase of $10.2 million in the other revenues from the acquisition of a majority interest in and consolidation of FYX during the second quarter of 2022 and (ii) an increase of $4.6 million in the offshore energy business as two of our vessels were on-hire longer in 2022 compared to 2021.
Expenses
Comparison of the three months ended JuneSeptember 30, 2022 and 2021
Total expenses increased $32.5$0.2 million primarily due to higher (i) interest expense, (ii)an increase in acquisition and transaction expenses driven by higher compensation and (iii) operating expenses.
Interest expense increased $13.9 million, which reflects an increase inrelated costs associated with acquisitions and the average outstanding debt of approximately $830.4 million due to increases in (i) the Senior Notes due 2028 of $502.3 million, (ii) the 2021 Bridge Loans of $339.8 million and (iii) the Revolving Credit Facility of $121.8 million,merger with FTAI, partially offset by a decrease in (iv) the Senior Notes due 2022 of $133.1 million, which was redeemed in full in May 2021.
Acquisitionmanagement fees and transaction expense increased $5.0 million primarily dueincentive allocation to professionalaffiliate driven by lower management fees related to strategic transactions.
Operating expenses increased $13.0 million which reflects increases of (i) cost of sales of $7.8 million, (ii) project costs of $1.9 million and (iii) compensation and benefits of $1.5 million primarily relatedallocated to the consolidation of FYX during the second quarter of 2022.Company.
Comparison of the sixnine months ended JuneSeptember 30, 2022 and 2021
Total expenses increased $51.9$2.2 million primarily due to higher (i) interest expensedriven by an increase in general and (ii)administrative expenses and acquisition and transaction expenses driven by higher compensation and (iii) operating expenses.
Interest expense increased $26.5 million, which reflects an increase inrelated costs associated with acquisitions and the average outstanding debt of approximately $893.3 million due to increases in (i) the Senior Notes due 2028 of $752.3 million, (ii) the 2021 Bridge Loans of $299.9 million and (iii) the Revolving Credit Facility of $107.6 million,merger with FTAI, partially offset by a decrease in (iv)management fees and incentive allocation to affiliate driven by lower management fees allocated to the Senior Notes due 2022 of $266.1 million, which was redeemed in full in May 2021.Company.
Acquisition and transaction expense
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA increased $9.3 million primarily due to professional fees related to strategic transactions.
Operating expenses increased $13.7 million which reflects increases of (i) cost of sales of $7.8 million, (ii) project costs of $3.6$1.6 million and (iii) compensation and benefits of $1.7 million primarily related to the consolidation of FYX during the second quarter of 2022.
Other expense
Total other expense decreased $2.7 million and $2.3$0.1 million during the three and sixnine months endedJune 30, 2022, respectively, primarily due to (i) a loss on extinguishment of debt of $3.3 million related to the redemption of the Senior Notes due 2022 in May 2021, partially offset by (ii) an increase of $1.1 million and $1.9 million in equity in losses of unconsolidated entities during the three and six months endedJune 30, 2022, respectively.
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA decreased $3.6 million and $2.8 million during the three and six months endedJune September 30, 2022, respectively, primarily due to the changes noted above.
Liquidity and Capital Resources
The Boardliquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of Directors delegated to a special committee comprised solely of independentinternally generated cash flows, capital contributions from Parent and disinterested board members the full power and responsibility to, among other things, (i) review, evaluate and negotiate certain transactions relating to the management agreements, the treatment of certain income incentive allocations and capital gains incentive allocations and the treatment of certain outstanding options held by the Manager and the non-employee directors of the Company (collectively, the “Specified Matters”) and (ii) act with respect to the Specified Matters. The special committee, after consultation with its independent legal and financial advisors, unanimously approved the terms of, and the entry into the agreements providing for, the Specified Matters. Following the determination of the special committee, on April 28, 2022, the Board of Directors unanimously approved the previously announced spin-off of the Company’s infrastructure business, subject to the Board of Directors declaring the distribution prior to the closing of the transaction. On July 11, 2022, the Board of Directors unanimously approved the details and timing of the previously announced and approved spin-off. The spin-off will be effected as a distribution of all of the shares owned by the Company of common stock of FTAI Infrastructure, a majority-owned subsidiary of the Company, to the holders of the Company’s common shares as of July 21, 2022. The distribution is expected to occur on or about August 1, 2022, subject to certain conditions. The Company expects to use the proceeds received from FTAI Infrastructure to repay all outstanding borrowings under its 2021 bridge loans and its revolving credit facility with the remaining proceeds to repay a portion of the 2025 Notes. On June 30, 2022, the Company issued a conditional notice of partial redemption to redeem $200 million aggregate principal amount of its outstanding 2025 Notes. See “Spin-off of FTAI Infrastructure” above for more information related to our liquidity plans.loan financing.
We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. This includes limiting discretionary spending across the organization and re-prioritizing our capital projectsinvestments amid the COVID-19 pandemic.pandemic and market volatility.
Our principal uses of liquidity have been and continue to be (i) acquisitions of transportation infrastructureaircraft and equipment,engines, (ii) dividendscapital distributions to Parent, (iii) release of maintenance and security deposits to our shareholderslessees, and holders of eligible participating securities, (iii)(iv) expenses associated with our operating activities, and (iv) debt service obligations associated with our investments.activities.
•
Cash used for the purpose of making investments was $457.9$396.2 million and $265.1$321.2 million during the sixnine months ended JuneSeptember 30, 2022 and 2021, respectively.
•Dividends
Capital distributions to shareholders and holders of eligible participating securitiesParent were $79.4$294.2 million and $68.0$145.0 million during the sixnine months ended JuneSeptember 30, 2022 and 2021, respectively.
•
Release of maintenance and security deposits were $0.9 million and $19.6 million during the nine months ended September 30, 2022 and 2021, respectively.
Uses of liquidity associated with our operating expenses are captured on a net basis in our cash flows from operating activities. Uses of liquidity associated with our debt obligations are captured in our cash flows from financing activities.
Our principal sources of liquidity to fund these uses have been and continue to be (i) revenues from our transportation infrastructure and equipmentaviation assets (including finance lease collections and maintenance reserve collections) net of operating expenses, (ii) proceedscapital contributions from borrowings or the issuance of securitiesParent and (iii) proceeds from asset sales.
•
Cash flows used inprovided by operating activities, plus the principal collections on finance leases and maintenance reserve collections were $23.6$191.1 million and $46.4$156.6 million during the sixnine months ended JuneSeptember 30, 2022 and 2021, respectively.
•During
Capital contributions from Parent were $242.1 million and $249.5 million during the sixnine months ended JuneSeptember 30, 2022 additional borrowings were obtained in connection with the (i)and 2021, Bridge Loans of $239.5 million, (ii) Revolving Credit Facility of $255.0 million and (iii) EB-5 Loan Agreement of $9.5 million. Werespectively.
made total principal repayments of $224.5 million relating to the Revolving Credit Facility. During the six months ended June 30, 2021, additional borrowings were obtained in connection with the (i) Senior Notes due 2028 of $500.0 million, (ii) Revolving Credit Facility of $250.0 million and (iii) EB-5 Loan Agreement of $26.1 million. We made total principal repayments of $552.7 million relating to the Senior Notes due 2022 and Revolving Credit Facility.
•Proceeds from the sale of assetsaviation equipment were $142.3$262.1 million and $57.2$78.5 million during the sixnine months ended JuneSeptember 30, 2022 and 2021, respectively.
•Proceeds from the issuance of preferred shares, net of underwriter’s discount and issuance costs were $101.2 million during the six months ended June 30, 2021.
We are currently evaluating several potential Equipment Leasingaviation transactions, and related financings, which could occur within the next 12 months. None of these potential transactions, negotiations, or financings are definitive or included within our planned liquidity needs. We cannot assure if or when any such transaction will be consummated or the terms of any such transaction or related financing.transaction.
Historical Cash Flow
Comparison of the sixnine months ended JuneSeptember 30, 2022 and 2021
The following table compares the historical cash flow for the sixnine months ended JuneSeptember 30, 2022 and 2021:
| | | | | | | | | | | |
| Six Months Ended June 30, |
(in thousands) | 2022 | | 2021 |
Cash Flow Data: | | | |
Net cash used in operating activities | $ | (48,569) | | | $ | (63,924) | |
Net cash used in investing activities | (306,784) | | | (204,209) | |
Net cash provided by financing activities | 212,097 | | | 249,960 | |
| | Nine Months Ended September 30, | |
(in thousands) | | 2022 | | | 2021 | |
Cash Flow Data: | | | | | | |
Net cash provided by operating activities | | $ | 151,304 | | | $ | 131,828 | |
Net cash used in investing activities | | | (124,180 | ) | | | (239,446 | ) |
Net cash (used in) provided by financing activities | | | (13,685 | ) | | | 108,318 | |
Net cash used inprovided by operating activities decreased $15.4increased $19.5 million, which primarily reflects (i) a decrease in net income of $63.7 million, and certain adjustments to reconcile net lossincome to cash used inprovided by operating activities including asset impairment(ii) an increase in gain on sale of $121.5 million, bad debt expenseassets of $48.0$88.7 million, and equity in losses of unconsolidated entities of $32.1 million and (ii)(iii) changes in working capital of $1.6$18.0 million, partially offset by (iii) an increaseand (iv) increases in our net lossasset impairment of $148.4$125.1 million.
Net cash used in investing activities increased $102.6decreased $115.3 million, primarily due to (i) an increase in acquisitions of leasing equipment of $150.6 million and (ii) an increase in acquisitions of property, plant and equipment of $34.6 million, partially offset by (iii) higher proceeds from the sale of leasing equipment of $80.9$183.6 million and (ii) an increase in proceeds from the sale of aircraft and engine of $7.2 million, partially offset by (iii) an increase in acquisition of leasing equipment of $61.7 million and (iv) an increase in purchase deposit for aircraft and engines of $14.8 million.
Net cash provided by financing activities decreased $37.9$122.0 million, primarily due to (i) an increase in capital contributions to Parent of $156.6 million, partially offset by (ii) an increase in receipt of maintenance deposits of $14.5 million and a decrease in repaymentsthe release of debtmaintenance deposits of $328.0 million and (ii) a decrease in proceeds from the issuance of preferred shares of $101.2 million, and (iii) a decrease in proceeds from debt of $272.1$18.7 million.
We use Funds Available for Distribution (“FAD”) in evaluating our ability to meet our stated dividend policy. FAD is not a financial measure in accordance with GAAP. The GAAP measure most directly comparable to FAD is net cash provided by operating activities. We believe FAD is a useful metric for investors and analysts for similar purposes.
We define FAD as: net cash provided by operating activities plus principal collections on finance leases, proceeds from sale of assets, and return of capital distributions from unconsolidated entities, less required payments on debt obligations and capital distributions to non-controlling interest, and excludes changes in working capital. The following table sets forth a reconciliation of Net Cash (Used in) Provided by Operating Activities to FAD:
| | | | | | | | | | | |
| Six Months Ended June 30, |
(in thousands) | 2022 | | 2021 |
Net Cash Used in Operating Activities | $ | (48,569) | | | $ | (63,924) | |
Add: Principal Collections on Finance Leases | 575 | | | 1,269 | |
Add: Proceeds from Sale of Assets | 142,324 | | | 57,155 | |
Add: Return of Capital Distributions from Unconsolidated Entities | — | | | — | |
Less: Required Payments on Debt Obligations (1) | (251) | | | — | |
Less: Capital Distributions to Non-Controlling Interest | — | | | — | |
Exclude: Changes in Working Capital | 86,667 | | | 88,248 | |
Funds Available for Distribution (FAD) | $ | 180,746 | | | $ | 82,748 | |
(1) Required payments on debt obligations for the six months ended June 30, 2022 exclude repayments of $224,473 for the Revolving Credit Facility. Required payments on debt obligations for the six months ended June 30, 2021 exclude repayments of $402,704 for the Senior Notes due 2022 and $150,000 for the Revolving Credit Facility
Limitations
FAD is subject to a number of limitations and assumptions and there can be no assurance that we will generate FAD sufficient to meet our intended dividends. FAD has material limitations as a liquidity measure because such measure excludes items that are required elements of our net cash provided by operating activities as described below. FAD should not be considered in isolation nor as a substitute for analysis of our results of operations under GAAP, and it is not the only metric that should be considered in evaluating our ability to meet our stated dividend policy. Specifically:
•FAD does not include equity capital called from our existing limited partners, proceeds from any debt issuance or future equity offering, historical cash and cash equivalents and expected investments in our operations.
•FAD does not give pro forma effect to prior acquisitions, certain of which cannot be quantified.
•While FAD reflects the cash inflows from sale of certain assets, FAD does not reflect the cash outflows to acquire assets as we rely on alternative sources of liquidity to fund such purchases.
•FAD does not reflect expenditures related to capital expenditures, acquisitions and other investments as we have multiple sources of liquidity and intend to fund these expenditures with future incurrences of indebtedness, additional capital contributions and/or future issuances of equity.
•FAD does not reflect any maintenance capital expenditures necessary to maintain the same level of cash generation from our capital investments.
•FAD does not reflect changes in working capital balances as management believes that changes in working capital are primarily driven by short term timing differences, which are not meaningful to our distribution decisions.
•Management has significant discretion to make distributions, and we are not bound by any contractual provision that requires us to use cash for distributions.
If such factors were included in FAD, there can be no assurance that the results would be consistent with our presentation of FAD.
Debt Obligations
Refer to Note 7 of the Consolidated Financial Statements for additional information.
Contractual Obligations
Our material cash requirements include the following contractual and other obligations:
DebtLoan Obligations—As of JuneSeptember 30, 2022 and December 31, 2021, we had outstanding principal and interest payment obligations of $3.6 billion$27.1 million and $1.1 billion,$25.2 million, respectively, of which, $339.8$0.0 million and $198.4$0.0 million, respectively, are due in the next twelve months. See Note 7 to the consolidated financial statements for additional information about our debtloan obligations.
Lease Obligations—As of JuneSeptember 30, 2022 and December 31, 2021, we had outstanding operating and finance lease obligations of $176.6$3.1 million and $2.4 million, of which, $9.2$0.8 million and $0.5 million is due in the next twelve months.
Other Obligations—As of June 30, 2022, in connection with a pipeline capacity agreement at Jefferson Terminal, we had an obligation to pay a minimum of $9.2 million in marketing fees in the next twelve months.
Other Cash Requirements—In addition to our contractual obligations, we pay quarterly cash dividends on our common shares and preferred shares, which are subject to change at the discretion of our Board of Directors. During the last twelve months, we declared cash dividends of $127.0 million and $27.2 million on our common shares and preferred shares, respectively.
We expect to meet our future short-term liquidity requirements through cash on hand unused borrowing capacity or future financings and net cash provided by our current operations. We expect that our operating subsidiaries will generate sufficient cash flow to cover operating expenses and the payment of principal and interest on our indebtedness as they become due. We may elect to meet certain long-term liquidity requirements or to continue to pursue strategic opportunities through utilizing cash on hand, cash generated from our current operations and the issuance of securities in the future. Management believes adequate capital and borrowings are available from various sources to fund our commitments to the extent required.
Critical Accounting Estimates and Policies
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 2 to the consolidated financial statements describes the significant accounting policies and methods used in the preparation of our consolidated financial statements.
GoodwillOperating Leases—Goodwill includesWe lease equipment pursuant to net operating leases. Operating leases with fixed rentals and step rentals are recognized on a straight-line basis over the excessterm of the lease, assuming no renewals. Revenue is not recognized when collection is not reasonably assured. When collectability is not reasonably assured, the customer is placed on non-accrual status and revenue is recognized when cash payments are received.
Generally, under our aircraft lease and engine agreements, the lessee is required to make periodic maintenance payments calculated based on the lessee’s utilization of the leased asset or at the end of the lease. Typically, under our aircraft lease agreements, the lessee is responsible for maintenance, repairs and other operating expenses throughout the term of the lease. These periodic maintenance payments accumulate over the term of the lease to fund major maintenance events, and we are contractually obligated to return maintenance payments to the lessee up to the amount paid by the lessee. In the event the total cost of maintenance events over the term of a lease is less than the cumulative maintenance payments, we are not required to return any unused or excess maintenance payments to the lessee.
Maintenance payments received for which we expect to repay to the lessee are presented as Maintenance Deposits in our Consolidated Balance Sheets. All excess maintenance payments received that we do not expect to repay to the lessee are recorded as Maintenance revenues. Estimates in recognizing revenue include mean time between removal, projected costs for engine maintenance and forecasted utilization of aircraft which are affected by historical usage patterns and overall industry, market and economic conditions. Significant changes to these estimates could have a material effect on the amount of revenue recognized in the period.
For purchase price overand lease back transactions, we account for the transaction as a single arrangement. We allocate the consideration paid based on the fair value of the aircraft and lease. The fair value of the lease may include a lease premium or discount.
Finance Leases—From time to time we enter into finance lease arrangements that include a lessee obligation to purchase the leased equipment at the end of the lease term, a bargain purchase option, or provides for minimum lease payments with a present value that equals or exceeds substantially all of the fair value of the leased equipment at the date of lease inception. Net investment in finance lease represents the minimum lease payments due from lessee, net tangibleof unearned income. The lease payments are segregated into principal and intangible assets associated withinterest components similar to a loan. Unearned income is recognized on an effective interest method over the acquisitionlease term and is recorded as finance lease income. The principal component of Jefferson Terminal, Transtar,the lease payment is reflected as a reduction to the net investment in finance leases. Revenue is not recognized when collection is not reasonably assured. When collectability is not reasonably assured, the customer is placed on non-accrual status and FYX. The carrying amountrevenue is recognized when cash payments are received.
Maintenance Payments—Typically, under an operating lease of goodwill was approximately $262.8 millionaircraft, the lessee is responsible for performing all maintenance and $257.1 million asis generally required to make maintenance payments to us for heavy maintenance, overhaul or replacement of June 30, 2022certain high-value components of the aircraft or engine. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending on the component, and December 31, 2021, respectively.are generally required to be made monthly in arrears. If a lessee is making monthly maintenance payments, we would typically be obligated to reimburse the lessee for costs they incur for heavy maintenance, overhaul or replacement of certain high-value components to the extent of maintenance payments received in respect of the specific maintenance event, usually shortly following the completion of the relevant work.
We reviewrecord the carryingportion of maintenance payments paid by the lessee that are expected to be reimbursed as maintenance deposit liabilities in the Consolidated Balance Sheets. Reimbursements made to the lessee upon the receipt of evidence of qualifying maintenance work are recorded against the maintenance deposit liability.
In certain acquired leases, we or the lessee may be obligated to make a payment to the other party at lease termination based on redelivery conditions stipulated at the inception of the lease. When the lessee is required to return the aircraft in an improved maintenance condition, we record a maintenance right asset, as a component of other assets, for the estimated value of the end-of-life maintenance payment at acquisition. We recognize payments received as end-of-lease compensation adjustments, within lease revenue or as a reduction to the maintenance right asset, when payment is received or collectability is assured. In the event we are required to make payments at the end of the lease for redelivery conditions, amounts are accrued as additional maintenance liability and expensed when we are obligated and can reasonably estimate such payment.
Property, Plant and Equipment, Leasing Equipment and Depreciation—Property, plant and equipment and leasing equipment are stated at cost (inclusive of capitalized acquisition costs, where applicable) and depreciated using the straight-line method, over estimated useful lives, to estimated residual values which are summarized as follows:
Asset | | Range of Estimated Useful Lives | | Residual Value Estimates |
Aircraft | | 25 years from date of manufacture | | Generally not to exceed 15% of manufacturer’s list price when new |
Aircraft engines | | 2 - 6 years, based on maintenance adjusted service life | | Sum of engine core salvage value plus the estimated fair value of life limited parts |
Aviation tooling and equipment | | 3 - 6 years from date of purchase | | Scrap value at end of useful life |
Furniture and fixtures | | 3 - 6 years from date of purchase | | None |
Impairment of goodwill at least annually to assess impairment since these assets are not amortized. An annual impairment review is conducted as of October 1stLong-Lived Assets—We perform a recoverability assessment of each year. Additionally, we review the carrying value of goodwillour long-lived assets whenever events or changes in circumstances, or indicators, indicate that itsthe carrying amount or net book value of an asset may not be recoverable. Indicators may include, but are not limited to, a significant lease restructuring or early lease termination; a significant change in market conditions; or the introduction of newer technology aircraft or engines. When performing a recoverability assessment, we measure whether the estimated future undiscounted net cash flows expected to be generated by the asset exceeds its net book value. The determinationundiscounted cash flows consist of cash flows from currently contracted leases, future projected leases, transition costs, estimated down time and estimated residual or scrap values. In the event that an asset does not meet the recoverability test, the carrying value of the asset will be adjusted to fair value involves significantresulting in an impairment charge.
Management develops the assumptions used in the recoverability analysis based on its knowledge of active contracts, current and future expectations of the global demand for a particular asset and historical experience in the leasing markets, as well as information received from third party industry sources. The factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in contracted lease rates, residual values, economic conditions, technology, demand for a particular asset type and other factors.
Income Taxes—The Company is an exempted entity domiciled in the Cayman Islands where income taxes are not imposed. The Company is considered a Passive Foreign Investment Company for U.S. income tax purposes and certain income taxes are imposed on our owners. Taxable income or loss generated by our corporate subsidiaries is subject to U.S. federal, state and foreign corporate income tax in locations where they conduct business.
We account for these taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is established when management judgment.
For an annual goodwill impairment assessment, an optional qualitative analysis may be performed. If the option is not elected or ifbelieves it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a goodwill impairment test isdeferred tax asset will not be realized.
performed to identify potential goodwill impairment and measure an impairment loss. A qualitative analysis was not elected for the year ended December 31, 2021.
A goodwill impairment assessment compares the fair value of the respective reporting unit with its carrying amount, including goodwill. The estimate of fair value of the respective reporting unit is based on the best information available as of the date of assessment, which primarily incorporates certain factors including our assumptions about operating results, business plans, income projections, anticipated future cash flows and market data. If the estimated fair value of the reporting unit is less than the carrying amount, a goodwill impairment is recorded to the extent that the carrying value of the reporting unit exceeds its fair value.
We estimate the fair value of the Jefferson and Transtar reporting units using an income approach, specifically a discounted cash flow analysis. This analysis requires us to make significant assumptions and estimates about the forecasted revenue growth rates, EBITDA margins, capital expenditures, the timing of future cash flows, and discount rates. The estimates and assumptions used consider historical performance if indicative of future performance and are consistent with the assumptions used in determining future profit plans for the reporting units.
In connection with our impairment analysis, although we believe the estimates of fair value are reasonable, the determination of certain valuation inputs is subject to management's judgment. Changes in these inputs, including as a result of events beyond our control, could materially affect the results of the impairment review. If the forecasted cash flows or other key inputs are negatively revised in the future, the estimated fair value of the reporting unit could be adversely impacted, potentially leading to an impairment in the future that could materially affect our operating results. Due to the acquisition of Transtar in 2021, the estimated fair value of that reporting unit approximates the book value. The Jefferson reporting unit had an estimated fair value that exceeded its carrying value by more than 10% but less than 20%. The Jefferson Terminal segment forecasted revenue is dependent on the ramp up of volumes under current and expected future contracts for storage and throughput of heavy and light crude and refined products and is subject to obtaining rail capacity for crude, expansion of refined product distribution to Mexico and movements in future oil spreads. At October 31, 2021, approximately 4.3 million barrels of storage was currently operational with 1.9 million barrels currently under construction for new contracts which will complete our storage development for our main terminal. Our discount rate for our 2021 goodwill impairment analysis was 9.0% and our assumed terminal growth rate was 2.0%. If our strategy changes from planned capacity downward due to an inability to source contracts or expand volumes, the fair value of the reporting unit would be negatively affected, which could lead to an impairment. The expansion of refineries in the Beaumont/Port Arthur area, as well as growing crude oil production in the U.S. and Canada, are expected to result in increased demand for storage on the U.S. Gulf Coast. Although we do not have significant direct exposure to volatility of crude oil prices, changes in crude oil pricing that affect long term refining planned output could impact Jefferson Terminal operations.
We expect the Jefferson Terminal segment to continue to generate positive Adjusted EBITDA in future years. Although certain of our anticipated contracts or expected volumes from existing contracts for Jefferson Terminal have been delayed, we continue to believe our projected revenues are achievable. Further delays in executing these contracts or achieving our projections could adversely affect the fair value of the reporting unit. The impact of the COVID-19 global pandemic during 2020 and 2021 negatively affected refining volumes and therefore Jefferson Terminal crude throughput but we have seen the activity starting to normalize and are expected to ramp back to normal during 2022. Furthermore, we anticipate strengthening macroeconomic demand for storage and the increasing spread between Western Canadian Crude and Western Texas Intermediate as Canadian crude pipeline apportionment increases. Also, as our pipeline connections became fully operational during 2021, we remain positive for the outlook of Jefferson Terminal's earnings potential.
There was no impairment of goodwill for the year ended December 31, 2021.
Recent Accounting Pronouncements
See
Please see Note 2 to our Consolidated Financial Statementsconsolidated financial statements included elsewhere in this filing for recent accounting pronouncements.
Item 3. Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk represents the risk of changes in value of a financial instrument, caused by fluctuations in interest rates and foreign exchange rates. ChangesWe believe that changes in these factors couldwould not cause significant fluctuations in our results of operations and cash flows. We are exposed to the market risks described below.
Item 4. | Controls and Procedures |
Interest Rate 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. Interest rate risk is highly sensitive to many factors, including the U.S. government’s monetary and tax policies, global 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 exposure relates to our term loan arrangements.
LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. The ICE Benchmark Administration ceased publication of one-week and two-month USD LIBOR settings after December 31, 2021 and intends to cease publishing the remaining USD LIBOR settings after June 30, 2023. We are monitoring related reform proposals and evaluating the related risks and, as a result of LIBOR’s phase out, amended our revolving credit facility to incorporate SOFR as the successor rate to LIBOR; however, it is not possible to predict the effects of any of these developments, and any future initiatives to regulate, reform or change the manner of administration of LIBOR, SOFR or other benchmark indices could result in adverse consequences to the rate of interest payable and receivable on, market value of and market liquidity for financial instruments tied to variable interest rate indices.
Our borrowing agreements generally require payments based on a variable interest rate index, such as SOFR. 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 leases. We may elect to manage our exposure to interest rate movements through the use of interest rate derivatives (interest rate swaps and caps).
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, if any. It also does not include a variety of other potential factors that could affect our business as a result of changes in interest rates. In addition, the following discussion does not take into account our Series A and Series B preferred shares, on which distributions currently accrue interest at a fixed rate but will accrue interest at a floating rate based on a certain variable interest rate index plus a spread from and after September 15, 2024.
As of June 30, 2022, assuming we do not hedge our exposure to interest rate fluctuations related to our outstanding floating rate debt, a hypothetical 100-basis point increase/decrease in our variable interest rate on our borrowings would result in an increase of approximately $4.4 million or a decrease of approximately $4.4 million in interest expense over the next 12 months.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of and for the period covered by this report.
Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1.
We are and may become involved in legal proceedings, including but not limited to regulatory investigations and inquiries, in the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, regulatory investigation or inquiry, in the opinion of management, we do not expect our current and any threatened legal proceedings to have a material adverse effect on our business, financial position or results of operations. Given the inherent unpredictability of these types of proceedings, however, it is possible that future adverse outcomes could have a material adverse effect on our financial results.
Item 1A. Risk Factors
You should carefully consider the following risks and other information in this Form 10-Q in evaluating us and our shares. Any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition. The risk factors generally have been separated into the following categories: risks related to our business, risks related to our Manager, risks related to taxation and risks related to our common shares and general risks.the Company’s shares. However, these categories do overlap and should not be considered exclusive.
Risks Related to the Spin-Off of Our Infrastructure Business
The proposed plan to spin-off our infrastructure business into a separate, publicly traded company may not be completed on the currently contemplated timeline or terms, or at all, and may not achieve the intended benefits.
The Board of Directors delegated to a special committee comprised solely of independent and disinterested board members the full power and responsibility to, among other things, (x) review, evaluate and negotiate certain transactions relating to the management agreements, the treatment of certain income incentive allocations and capital gains incentive allocations and the treatment of certain outstanding options held by the Manager and the non-employee directors of the Company (collectively, the “Specified Matters”) and (y) act with respect to the Specified Matters. The special committee, after consultation with its independent legal and financial advisors, unanimously approved the terms of, and the entry into the agreements providing for, the Specified Matters. Following the determination of the special committee, on April 28, 2022, our board of directors unanimously approved the previously announced plan to spin off our infrastructure business, subject to the Board of Directors declaring the distribution prior to the closing of the transaction. On July 11, 2022, the Board of Directors unanimously approved the details and timing of the previously announced and approved spin-off. We expect the spin-off to be completed on or around August 1, 2022, subject to certain conditions, through a pro-rata distribution to the Company’s common shareholders of all of the shares of common stock of FTAI Infrastructure Inc. that the Company owns as of July 21, 2022. The infrastructure business is expected to be spun out in an entity taxed as a corporation for U.S. federal income tax purposes and will hold, among other things, our Jefferson, Repauno, Long Ridge and Transtar assets, and will retain all related project-level debt of those entities. FTAI Infrastructure’s common stock has been approved to be listed on The Nasdaq Global Select Market under the ticker symbol “FIP”. We expect to retain our aviation business and certain other assets and our remaining outstanding corporate indebtedness.
The spin-off poses risks and challenges that could negatively impact our business, and there can be no assurance that the spin-off will be completed as anticipated or at all. Our ability to complete the spin-off is subject to, among other things, the formal declaration of the distribution by our board of directors. Such conditions and other unforeseen developments, including in the debt or equity markets or general market conditions, could delay or prevent the spin-off or cause the spin-off to occur on terms or conditions that are less favorable and/or different than anticipated. Moreover, even if all the conditions have been satisfied, if our board of directors determines, in its sole discretion, that the spin-off is not in the best interests of the Company and its shareholders, our board may terminate the spin-off. Failure to complete the spin-off could negatively affect the price of our common shares.
In addition, the spin-off may not have the full or any strategic and financial benefits that we expect, or such benefits may be delayed or may not materialize at all. The anticipated benefits of the spin-off are based on a number of assumptions, which may prove incorrect. For example, the Company believes that having two independent companies with distinct investment profiles will maximize the strategic focus and financial flexibility of each company to grow and return capital to shareholders. In the event that the spin-off does not have these and other expected benefits, the costs associated with the transaction could have a negative effect on our financial condition and ability to make distributions to shareholders. There may also be disruptions to our business as a result of the separation, including a diversion of management’s time and attention from our regular business operations, which could result in a loss of revenue. We and FTAI Infrastructure are expected to incur significant one-time costs and ongoing costs in connection with, or as a result of, the spin-off, including costs of operating each business as an independent, publicly traded company and paying separate management and incentive fees, among others. Further, the combined value of the shares of the two publicly traded companies may not be equal to or greater than the value of the Company’s common shares if the spin-off had not occurred. These costs, disruptions and uncertainties, or others, may exceed our estimates or could negate some or all of the benefits we expect to realize from the spin-off, which could have a material adverse effect on our business, financial condition, results of operations and prospects, whether the proposed spin-off is completed or not.
Risks Related to Our Business
A pandemic, including COVID-19, could have an adverse impact on our business, financial condition, and results of operations.
In recent years, the outbreaks of certain highly contagious diseases have increased the risk of a pandemic resulting in economic disruptions. In particular, the ongoing COVID-19 pandemic has led to severe disruptions in the market and the global, U.S. and regional economies that may continue for a prolonged duration and trigger a recession or a period of economic slowdown. In response, various governmental bodies and private enterprises have implemented, and may in the future implement, numerous measures intended to mitigate the outbreak, such as travel bans and restrictions, quarantines, shutdowns and testing or vaccination mandates. The COVID-19 pandemic continues to be dynamic and evolving, including a resurgence of COVID-19 cases in certain geographies, and its ultimate scope, duration and impact, including the efficacy and availability of vaccines, remain uncertain.
The ongoing COVID-19 pandemic adversely affected our Jefferson Terminal business in several material ways during the years ended December 31, 2020 and 2021. Although difficult to quantify the impact, the pandemic adversely affected macro trends in refinery utilization rates in the United States and the global consumption of petroleum and liquid fuels in 2020 and part of 2021, which adversely affected our revenue potential at our Jefferson Terminal business. In addition, we were unable to complete anticipated new customer contracts and certain of our existing customers did not increase volumes as anticipated which also adversely affected our revenue potential for those periods.
We expect that this pandemic, and any future epidemic or pandemic crises, could result in direct and indirect adverse effects on our industryindustries and customers, which in turn may impact our business, results of operations and financial condition. Effects of the current pandemic have included, or may in the future include, among others:
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deterioration of worldwide, regional or national economic conditions and activity, which could adversely affect global demand for crude oil and petroleum products, demand for our services, and time charter and spot rates;
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disruptions to our operations as a result of the potential health impact, such as the availability and efficacy of vaccines, on our employees and crew, and on the workforceswork forces of our customers and business partners;
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disruptions to our business from, or additional costs related to, new regulations, directives or practices implemented in response to the pandemic, such as travel restrictions, increased inspection regimes, hygiene measures (such as quarantining and physical distancing) or increased implementation of remote working arrangements;
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asset impairment charges and a decline in revenues;
a lack of air travel demand or an inability of airlines to operate to or from certain regions could impact demand for air travel and the financial health of certain airlines, including increasing the financial stress of our lessees;
•potential delays in the loading and discharging of cargo on or from our vessels, and
any related off hire due to global supply chain disruptions resulting from quarantines, worker health, regulations or other impacts of the COVID-19 pandemic, which in turn could disrupt our operations and result in a reduction of revenue;
•potential shortages or a lack of access to required spare parts for our vessels, or potential delays in any repairs to, scheduled or unscheduled maintenance or modifications;
•potential delays in vessel inspections and related certifications by class societies, customers or government agencies;
•potential reduced cash flows and financial condition, including potential liquidity constraints;
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reduced access to or increased cost of capital, including the ability to refinance any existing obligations, as a result of any credit tightening generally or due to continued declines in global financial markets, including potential interest rate increases and declines in the prices of publicly-traded securities of us, our peers and of listed companies generally; and
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potential deterioration in the financial condition and prospects of our customers, joint venture partners or business partners, or attempts by customers or third parties to invoke force majeure contractual clauses as a result of delays or other disruptions.
As the COVID-19 pandemic continues to evolve, the extent to which COVID-19 impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the outbreak, and the actions that may be required to try and contain COVID-19 or treat its impact. We continue to monitor the pandemic and, the extent to which the continued spread of the virus adversely affects our customer base and therefore revenue. As the COVID-19 pandemic is complex and rapidly evolving, our plans as described above may change. At this point, we cannot reasonably estimate the duration and severity of this pandemic, which could have a material adverse impact on our business, results of operations, financial position and cash flows.
Uncertainty relating to macroeconomic conditions may reduce the demand for our assets, result in non-performance of contracts by our lessees, or charterers, limit our ability to obtain additional capital to finance new investments, or have other unforeseen negative effects.
Uncertainty and negative trends in general economic conditions in the United States and abroad, including significant tightening of credit markets and commodity price volatility, historically have created difficult operating environments for owners and operators in the transportation industry.aviation industries. Many factors, including factors that are beyond our control, may impact our operating
results or financial condition and/or affect the lessees and charterers that form our customer base. For some years, the world has experienced weakened economic conditions and volatility following adverse changes in global capital markets. Excess supply in oil and gas markets can put significant downward pressure on prices for these commodities, and may affect demand for assets used in production, refining and transportation of oil and gas. In the past, a significant decline in oil prices has led to lower offshore exploration and production budgets worldwide. These conditions have resulted in significant contraction, deleveraging and reduced liquidity in the credit markets. A number of governments have implemented, or are considering implementing, a broad variety of governmental actions or new regulations for the financial markets. In addition, limitations on the availability of capital, higher costs of capital for financing expenditures or the desire to preserve liquidity, may cause our current or prospective customers to make reductions in future capital budgets and spending.
Further, demand for our assets is related to passenger and cargo traffic growth, which in turn is dependent on general business and economic conditions. Global economic downturns could have an adverse impact on passenger and cargo traffic levels and consequently our lessees’ and charterers’ business, which may in turn result in a significant reduction in revenues, earnings and cash flows, difficulties accessing capital and a deterioration in the value of our assets. We have in the past been exposed to increased credit risk from our customers and third parties who have obligations to us, which resulted in non-performance of contracts by our lessees and adversely impacted our business, financial condition, results of operations and cash flows. We cannot assure you that similar loss events may not occur in the future.
The industries
Instability in geographies where we have assets or where we derive revenue could have a material adverse effect on our business, customers, operations and financial results.
Economic, civil, military and political uncertainty exists and may increase in regions where we operate and derive our revenue. Various countries in which we operate are experiencing and may continue to experience military action and civil and political unrest. We have assets in the emerging market economies of Eastern Europe, including some assets in Russia and Ukraine. In late February 2022, Russian military forces launched significant military action against Ukraine. Sustained conflict and disruption in the region is likely. The impact to Russia and Ukraine, as well as actions taken by other countries, including new and stricter export controls and sanctions by Canada, the United Kingdom, the European Union, the U.S. and other countries and organizations against officials, individuals, regions, and industries in Russia and Ukraine, and each country’s potential response to such sanctions, tensions and military actions, could have a material adverse effect on our business and delay or prevent us from accessing certain of our assets. We are actively monitoring the security of our remaining assets in the region.
The aviation industry has experienced periods of oversupply during which lease rates and asset values have declined, particularly during the most recent economic downturn, and any future oversupply could materially adversely affect our results of operations and cash flows.
The oversupply of a specific asset is likely to depress the lease or charter rates for and the value of that type of asset and result in decreased utilization of our assets, and the industries in which we operate have experienced periods of oversupply during which rates and asset values have declined, particularly during the most recent economic downturn. Factors that could lead to such oversupply include, without limitation:
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general demand for the type of assets that we purchase;
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general macroeconomic conditions, including market prices for commodities that our assets may serve;
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geopolitical events, including war, prolonged armed conflict and acts of terrorism;
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outbreaks of communicable diseases and natural disasters;
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the availability of credit;
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potential reduced cash flows and financial condition, including potential liquidity restraints;
restructurings and bankruptcies of companies in the industries in which we operate, including our customers;
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manufacturer production levels and technological innovation;
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manufacturers merging or exiting the industry or ceasing to produce certain asset types;
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retirement and obsolescence of the assets that we own;
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increases in supply levels of assets in the market due to the sale or merging of operating lessors; and
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reintroduction of previously unused or dormant assets into the industries in which we operate.
These and other related factors are generally outside of our control and could lead to persistence of, or increase in, the oversupply of the types of assets that we acquire or decreased utilization of our assets, either of which could materially adversely affect our results of operations and cash flow. In addition, aviation lessees may redeliver our assets to locations where there is oversupply, which may lead to additional repositioning costs for us if we move them to areas with higher demand. Positioning expenses vary depending on geographic location, distance, freight rates and other factors, and may not be fully covered by drop-off charges collected from the last lessees of the equipment or pick-up charges paid by the new lessees. Positioning expenses can be significant if a large portion of our assets are returned to locations with weak demand, which could materially adversely affect our business, prospects, financial condition, results of operations and cash flows.
There can
The airline industry is heavily regulated, and if we fail to comply with applicable requirements, our results of operations could suffer.
The Federal Aviation Administration (“FAA”) and equivalent regulatory agencies have increasingly focused on the need to assure that airline industry products are designed with sufficient cybersecurity controls to protect against unauthorized access or other unwanted compromise. A failure to meet these evolving expectations could negatively impact sales into the industry and expose us to legal or contractual liability.
Governmental agencies throughout the world, including the FAA, prescribe standards and qualification requirements for aircraft components, including virtually all commercial airline and general aviation products. Specific regulations vary from country to country, although compliance with FAA requirements generally satisfies regulatory requirements in other countries. If any material authorization or approval qualifying us to supply our products is revoked or suspended, then sale of the product would be no assurance that any target returns will be achieved.
Our target returns for assets are targets only and are not forecasts of future profits. We develop target returns basedprohibited by law, which would have an adverse effect on our Manager’s assessmentbusiness, financial condition and results of appropriate expectations for returns on assetsoperations.
From time to time, the FAA or equivalent regulatory agencies in other countries propose new regulations or changes to existing regulations, which often are more stringent than existing regulations. If such proposals are adopted and the ability of our Manager to enhance the return generated by those assets through active management. There can be no assurance that these assessments and expectations will be achieved and failureenacted, we may incur significant additional costs to achieve any or all of them may materially adversely impact our ability to achieve any target return with respect to any or all of our assets.
In addition, our target returns are based on estimates and assumptions regarding a number of other factors, including, without limitation, holding periods, the absence of material adverse events affecting specific investments (whichcompliance, which could include, without limitation, natural disasters, terrorism, social unrest or civil disturbances), general and local economic and market conditions, changes in law, taxation, regulation or governmental policies and changes in the political approach to transportation investment, either generally or in specific countries in which we may invest or seek to invest. Many of these factors, as well as the other risks described elsewhere in this report, are beyond our control and all could adversely affect our ability to achieve a target return with respect to an asset. Further, target returns are targets for the return generated by specific assets and not by us. Numerous
factors could prevent us from achieving similar returns, notwithstanding the performance of individual assets, including, without limitation, taxation and fees payable by us or our operating subsidiaries, including fees and incentive allocation payable to our Manager.
There can be no assurance that the returns generated by any of our assets will meet our target returns, or any other level of return, or that we will achieve or successfully implement our asset acquisition objectives, and failure to achieve the target return in respect of any of our assets could, among other things, have a material adverse effect on our business, prospects, financial condition and results of operationsoperations.
Recent trends by China’s aviation authority to relax restrictions on airspace may be reversed, and cash flows. Further, even if the returns generated by individual assets meet target returns, there can be no assurance that the returns generated by other existinganticipated new regulations loosening airspace restrictions may not materialize, which could impact sales prospects in China for our commercial aerospace businesses.
The retirement or future assets would do so,prolonged grounding of commercial aircraft could reduce our revenues and the historical performancevalue of any related inventory.
We sell aircraft components and replacement parts. If aircraft or engines for which we offer aircraft components and replacement parts are retired or grounded for prolonged periods of time and there are fewer aircraft that require these components or parts, our revenues may decline as well as the assets in our existing portfolio should not be considered as indicativevalue of future results with respect to any assets.related inventory.
Contractual defaults may adversely affect our business, prospects, financial condition, results of operations and cash flows by decreasing revenues and increasing storage, positioning, collection, recovery and lost equipment expenses.
The success of our business depends in large part on the success of the operators in the sectors in which we participate. Cash flows from our assets are substantially impacted by our ability to collect compensation and other amounts to be paid in respect of such assets from the customers with whom we enter into leases charters or other contractual arrangements. Inherent in the nature of the leases charters and other arrangements for the use of such assets is the risk that we may not receive, or may experience delay in realizing, such amounts to be paid. While we target the entry into contracts with credit-worthy counterparties, no assurance can be given that such counterparties will perform their obligations during the term of the leases charters or other contractual arrangements. In addition, when counterparties default, we may fail to recover all of our assets, and the assets we do recover may be returned in damaged condition or to locations where we will not be able to efficiently lease charter or sell them. In most cases, we maintain, or require our lessees to maintain, certain insurances to cover the risk of damages or loss of our assets. However, these insurance policies may not be sufficient to protect us against a loss.
Depending on the specific sector, the risk of contractual defaults may be elevated due to excess capacity as a result of oversupply during the most recent economic downturn. We lease assets to our customers pursuant to fixed-price contracts, and our customers then seek to utilize those assets to transport goods and provide services. If the price at which our customers receive for their transportation services decreases as a result of an oversupply in the marketplace, then our customers may be forced to reduce their prices in order to attract business (which may have an adverse effect on their ability to meet their contractual lease obligations to us), or may seek to renegotiate or terminate their contractual lease arrangements with us to pursue a lower-priced opportunity with another lessor, which may have a direct, adverse effect on us. See “-The industries in which we operate have experienced periods of oversupply during which lease rates and asset values have declined, particularly during the most recent economic downturn, and any future oversupply could materially adversely affect our results of operations and cash flows.” Any default by a material customer would have a significant impact on our profitability at the time the customer defaulted, which could materially adversely affect our operating results and growth prospects. In addition, some of our counterparties may reside in jurisdictions with legal and regulatory regimes that make it difficult and costly to enforce such counterparties’ obligations.
If we acquire a high concentration of a particular type of asset, or concentrate our investments in a particular sector, our business, prospects, financial condition, results of operations and cash flows could be adversely affected by changes in market demand or problems specific to that asset or sector.
If we acquire a high concentration of a particular asset, or concentrate our investments in a particular sector, our business and financial results could be adversely affected by sector-specific or asset-specific factors. For example, if a particular sector experiences difficulties such as increased competition or oversupply, the operators we rely on as a lessor may be adversely affected and consequently our business and financial results may be similarly affected. If we acquire a high concentration of a particular asset and the market demand for a particular asset declines, it is redesigned or replaced by its manufacturer or it experiences design or technical problems, the value and rates relating to such asset may decline, and we may be unable to lease or charter such asset on favorable terms, if at all. Any decrease in the value and rates of our assets may have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows.
We operate in highly competitive markets.
The business of acquiring transportation and transportation-related infrastructureaviation assets is highly competitive. Market competition for opportunities includes traditional transportation and infrastructure companies, commercial and investment banks, as well as a growing number of non-traditional participants, such as hedge funds, private equity funds and other private investors, including Fortress-related entities. Some of these competitors may have access to greater amounts of capital and/or to capital that may be committed for longer periods of time or may have different return thresholds than us, and thus these competitors may have certain advantages not shared by us. In addition, competitors may have incurred, or may in the future incur, leverage to finance their debt investments at levels or on terms more favorable than those available to us. Strong competition for investment opportunities could result in fewer such opportunities for us, as certain of these competitors have established and are establishing investment vehicles that target the same types of assets that we intend to purchase.
In addition, some of our competitors may have longer operating histories, greater financial resources and lower costs of capital than us, and consequently, may be able to compete more effectively in one or more of our target markets. We likely will not always be able to compete successfully with our competitors and competitive pressures or other factors may also result in
significant price competition, particularly during industry downturns, which could have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows.
Certain liens may arise on our assets.
Certain of our assets are currently subject to liens under separate financing arrangements entered into by certain subsidiaries in connection with acquisitions of assets. In the event of a default under such arrangements by the applicable subsidiary, the lenders thereunder would be permitted to take possession of or sell such assets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.” In addition, our currently owned assets and assets that we purchase in the future may be subject to other liens based on the industry practices relating to such assets. Until they are discharged, these liens could impair our ability to repossess, re-lease or sell our assets, and to the extent our lessees or charterers do not comply with their obligations to discharge any liens on the applicable assets, we may find it necessary to pay the claims secured by such liens in order to repossess such assets. Such payments could materially adversely affect our operating results and growth prospects.
The values of our assets may fluctuate due to various factors.
The fair market values of our assets may decrease or increase depending on a number of factors, including the prevailing level of charter or lease rates from time to time, general economic and market conditions affecting our target markets, type and age of assets, supply and demand for assets, competition, new governmental or other regulations and technological advances, all of which could impact our profitability and our ability to lease, charter, develop, operate, or sell such assets. In addition, our assets depreciate as they age and may generate lower revenues and cash flows. We must be able to replace such older, depreciated assets with newer assets, or our ability to maintain or increase our revenues and cash flows will decline. In addition, if we dispose of an asset for a price that is less than the depreciated book value of the asset on our balance sheet or if we determine that an asset’s value has been impaired, we will recognize a related charge in our consolidated statement of operations and such charge could be material.
We may not generate a sufficient amount of cash or generate sufficient free cash flow to fund our operations or repay our indebtedness.
Our ability to make payments on our indebtedness as required depends on our ability to generate cash flow in the future. This ability, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we do not generate sufficient free cash flow to satisfy our debt obligations, including interest payments and the payment of principal at maturity, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot provide assurance that any refinancing would be possible, that any assets could be sold, or, if sold, of the timeliness and amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional financing would be permitted under the terms of our various debt instruments then in effect. Furthermore, our ability to refinance would depend upon the condition of the finance and credit markets. Our inability to generate sufficient free cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms or on a timely basis, would materially affect our business, financial condition and results of operations.
We may acquire operating businesses, including businesses whose operations are not fully matured and stabilized. These businesses may be subject to significant operating and development risks, including increased competition, cost overruns and delays, and difficulties in obtaining approvals or financing. These factors could materially affect our business, financial condition, liquidity and results of operations.
We have acquired, and may in the future acquire, operating businesses, including businesses whose operations are not fully matured and stabilized (including, but not limited to, our businesses within the Jefferson Terminal, Ports and Terminals and Transtar segments). While we have deep experience in the construction and operation of these companies, we are nevertheless subject to significant risks and contingencies of an operating business, and these risks are greater where the operations of such businesses are not fully matured and stabilized. Key factors that may affect our operating businesses include, but are not limited to:
•competition from market participants;
•general economic and/or industry trends, including pricing for the products or services offered by our operating businesses;
•the issuance and/or continued availability of necessary permits, licenses, approvals and agreements from governmental agencies and third parties as are required to construct and operate such businesses;
•changes or deficiencies in the design or construction of development projects;
•unforeseen engineering, environmental or geological problems;
•potential increases in construction and operating costs due to changes in the cost and availability of fuel, power, materials and supplies;
•the availability and cost of skilled labor and equipment;
•our ability to enter into additional satisfactory agreements with contractors and to maintain good relationships with these contractors in order to construct development projects within our expected cost parameters and time frame, and the ability of those contractors to perform their obligations under the contracts and to maintain their creditworthiness;
•potential liability for injury or casualty losses which are not covered by insurance;
•potential opposition from non-governmental organizations, environmental groups, local or other groups which may delay or prevent development activities;
•local and economic conditions;
•changes in legal requirements; and
•force majeure events, including catastrophes and adverse weather conditions.
Any of these factors could materially affect our business, financial condition, liquidity and results of operations.
Our use of joint ventures or partnerships, and our Manager’s outsourcing of certain functions, may present unforeseen obstacles or costs.
We have acquired and may in the future acquire interests in certain assets in cooperation with third-party partners or co-investors through jointly-owned acquisition vehicles, joint ventures or other structures. In these co-investment situations, our ability to control the management of such assets depends upon the nature and terms of the joint arrangements with such partners and our relative ownership stake in the asset, each of which will be determined by negotiation at the time of the investment and the determination of which is subject to the discretion of our Manager. Depending on our Manager’s perception of the relative risks and rewards of a particular asset, our Manager may elect to acquire interests in structures that afford relatively little or no operational and/or management control to us. Such arrangements present risks not present with wholly-owned assets, such as the possibility that a co-investor becomes bankrupt, develops business interests or goals that conflict with our interests and goals in respect of the assets, all of which could materially adversely affect our business, prospects, financial condition, results of operations and cash flows.
In addition, our Manager expects to utilize third-party contractors to perform services and functions related to the operation and leasing of our assets. These functions may include billing, collections, recovery and asset monitoring. Because we and our Manager do not directly control these third parties, there can be no assurance that the services they provide will be delivered at a level commensurate with our expectations, or at all. The failure of any such third-party contractors to perform in accordance with our expectations could materially adversely affect our business, prospects, financial condition, results of operations and cash flows.
We are subject to the risks and costs of obsolescence of our assets.
Technological and other improvements expose us to the risk that certain of our assets may become technologically or commercially obsolete. For example, in our Aviation Leasing segment, as manufacturers introduce technological innovations and new types of aircraft, some of our assets could become less desirable to potential lessees. Such technological innovations may increase the rate of obsolescence of existing aircraft faster than currently anticipated by us. In addition, the imposition of increased regulation regarding stringent noise or emissions restrictions may make some of our aircraft less desirable and less valuable in the marketplace. In our offshore energy business, development and construction of new, sophisticated, high-specification assets could cause our assets to become less desirable to potential charterers, and insurance rates may also increase with the age of a vessel, making older vessels less desirable to potential charterers. Any of these risks may adversely affect our ability to lease charter or sell our assets on favorable terms, if at all, which could materially adversely affect our operating results and growth prospects.
The North American rail sectorinability to obtain certain components from suppliers could harm our business.
Our business is affected by the availability and price of the component parts that we use to manufacture our products. Our ability to manage inventory and meet delivery requirements may be constrained by our suppliers’ ability to adjust delivery of long-lead time products during times of volatile demand. The supply chains for our business could also be disrupted by external events such as natural disasters, extreme weather events, pandemics, labor disputes, governmental actions and legislative or regulatory changes. As a highly regulated industryresult, our suppliers may fail to perform according to specifications when required and we may be unable to identify alternate suppliers or to otherwise mitigate the consequences of their non-performance.
Transitions to new suppliers may result in significant costs and delays, including those related to the required recertification of parts obtained from new suppliers with our customers and/or regulatory agencies. Our inability to fill our supply needs could jeopardize our ability to fulfill obligations under customer contracts, which could result in reduced revenues and profits, contract penalties or terminations, and damage to customer relationships. Further, increased costs of compliance with, or liability for violation of, existing or future laws, regulations and other requirementssuch components could significantly increasereduce our operational costs of doing business, thereby adversely affecting our profitability.
The rail sector is subject to extensive laws, regulations and other requirements including, but not limited to, those relating to the environment, safety, rates and charges, service obligations, employment, labor, immigration, minimum wages and overtime pay, health care and benefits, working conditions, public accessibility and other requirements. These laws and regulations are enforced by U.S. federal agencies including the U.S. Environmental Protection Agency (the “U.S. EPA”), the U.S. Department of Transportation (the “DOT”), the Occupational Safety and Health Act (the “OSHA”), the U.S. Federal Railroad Administration (the “FRA”), and the U.S. Surface Transportation Board (the “STB”), as well as numerous other state, provincial, local and federal agencies. Ongoing compliance with, or a violation of, these laws, regulations and other requirements could have a material adverse effect on our business, financial condition and results of operations.
We believe that our rail operations are in substantial compliance with applicable laws and regulations. However, these laws and regulations, and the interpretation or enforcement thereof, are subject to frequent change and varying interpretation by regulatory authorities, andprofits if we arewere unable to predict the ongoing costpass along such price in-creases to us of complying with these laws and regulations or the future impact of these laws and regulations on our operations. In addition, from time to time we are subject to inspections and investigations by various regulators. Violation of environmental or other laws, regulations and permits can result in the imposition of significant administrative, civil and criminal penalties, injunctions and construction bans or delays.customers.
Legislation passed by the U.S. Congress or Canadian Parliament or new regulations issued by federal agencies can significantly affect the revenues, costs and profitability of our business. For instance, more recently proposed bills such as the “Rail Shipper Fairness Act of 2017,” or competitive access proposals under consideration by the STB, if adopted, could increase government involvement in railroad pricing, service and operations and significantly change the federal regulatory framework of the railroad industry. Several of the changes under consideration could have a significant negative impact on the Company’s ability to determine prices for rail services, meet service standards and could force a reduction in capital spending. Statutes imposing price constraints or affecting rail-to-rail competition could adversely affect the Company’s profitability.
Under various U.S. and Canadian federal, state, provincial and local environmental requirements, as the owner or operator of terminals or other facilities, we may be liable for the costs of removal or remediation of contamination at or from our existing locations, whether we knew of, or were responsible for, the presence of such contamination. The failure to timely report and properly remediate contamination may subject us to liability to third parties and may adversely affect our ability to sell or rent our property or to borrow money using our property as collateral. Additionally, we may be liable for the costs of remediating third-party sites where hazardous substances from our operations have been transported for treatment or disposal, regardless of whether we own or operate that site. In the future, we may incur substantial expenditures for investigation or remediation of contamination that has not yet been discovered at our current or former locations or locations that we may acquire.
A discharge of hydrocarbons or hazardous substances into the environment associated with operating our rail assets could subject us to substantial expense, including the cost to recover the materials spilled, restore the affected natural resources, pay fines and penalties, and natural resource damages and claims made by employees, neighboring landowners, government authorities and other third parties, including for personal injury and property damage. We may experience future catastrophic sudden or gradual releases into the environment from our facilities or discover historical releases that were previously unidentified or not assessed. Although our inspection and testing programs are designed to prevent, detect and address any such releases promptly, the liabilities incurred due to any future releases into the environment from our assets, have the potential to substantially affect our business. Such events could also subject us to media and public scrutiny that could have a negative effect on our operations and also on the value of our common shares.
We could be negatively impacted by environmental, social, and governance (ESG) and sustainability-related matters.
Governments, investors, customers, employees and other stakeholders are increasingly focusing on corporate ESG practices and disclosures, and expectations in this area are rapidly evolving. We have announced, and may in the future announce, sustainability-focused investments, partnerships and other initiatives and goals. These initiatives, aspirations, targets or objectives reflect our current plans and aspirations and are not guarantees that we will be able to achieve them. Our efforts to accomplish and accurately report on these initiatives and goals present numerous operational, regulatory, reputational, financial, legal, and other risks, any of which could have a material negative impact, including on our reputation and stock price.
In addition, the standards for tracking and reporting on ESG matters are relatively new, have not been harmonized and continue to evolve. Our selection of disclosure frameworks that seek to align with various voluntary reporting standards may change from time to time and may result in a lack of comparative data from period to period. Moreover, our processes and controls may not always align with evolving voluntary standards for identifying, measuring, and reporting ESG metrics, our interpretation of reporting standards may differ from those of others, and such standards may change over time, any of which could result in significant revisions to our goals or reported progress in achieving such goals. In this regard, the criteria by which our ESG practices and disclosures are assessed may change due to the quickly evolving landscape, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. The increasing attention to corporate ESG initiatives could also result in increased investigations and litigation or threats thereof. If we are unable to satisfy such new criteria, investors may conclude that our ESG and sustainability practices are inadequate. If we fail or are perceived to have failed to achieve previously announced initiatives or goals or to accurately disclose our progress on such initiatives or goals, our reputation, business, financial condition and results of operations could be adversely impacted.
We transport hazardous materials.
We transport certain hazardous materials and other materials, including crude oil and toxic inhalation hazard (TIH) materials, such as ammonia, that pose certain risks in the event of a release or combustion. Additionally, U.S. laws impose common carrier obligations on railroads that require us to transport certain hazardous materials regardless of risk or potential exposure to loss. In addition, insurance premiums charged for, or the self-insured retention associated with, some or all of the coverage currently maintained by us could increase dramatically or certain coverage may not be available to us in the future if there is a catastrophic event related to rail transportation of these materials. A rail accident or other incident or accident on our network, at our facilities, or at the facilities of our customers involving the release or combustion of hazardous materials could involve significant costs and claims for personal injury, property damage, and environmental penalties and remediation in excess of our insurance coverage for these risks, which could have a material adverse effect on our results of operations, financial condition, and liquidity.
Our business could be adversely affected if service on the railroads is interrupted or if more stringent regulations are adopted regarding railcar design or the transportation of crude oil by rail.
As a result of hydraulic fracturing and other improvements in extraction technologies, there has been a substantial increase in the volume of crude oil and liquid hydrocarbons produced and transported in North America, and a geographic shift in that production versus historical production. The increase in volume and shift in geography has resulted in increased pipeline congestion and a corresponding growth in crude oil being transported by rail from Canada and across the U.S. High-profile accidents involving crude-oil-carrying trains in Quebec, North Dakota and Virginia, and more recently in Saskatchewan, West Virginia and Illinois, have raised concerns about derailments and the environmental and safety risks associated with crude oil transport by rail and the associated risks arising from railcar design. In Canada, the transport of hazardous products is receiving greater scrutiny which could impact our customers and our business.
In May 2015, the DOT issued new production standards and operational controls for rail tank cars used in “High-Hazard Flammable Trains” (i.e., trains carrying commodities such as ethanol, crude oil and other flammable liquids). Similar standards have been adopted in Canada. The new standard applies for all cars manufactured after October 1, 2015, and existing tank cars must be retrofitted within the next three to eight years. The applicable operational controls include reduced speed restrictions, and maximum lengths on trains carrying these materials. Retrofitting our tank cars will be required under these new standards to the extent we elect to move certain flammable liquids in the future. While we may be able to pass some of these costs on to our customers, there may be costs that we cannot pass on to them. We continue to monitor the railcar regulatory landscape and remain in close contact with railcar suppliers and other industry stakeholders to stay informed of railcar regulation rulemaking developments. It is unclear how these regulations will impact the crude-by-rail industry, and any such impact would depend on a number of factors that are outside of our control. If, for example, overall volume of crude-by-rail decreases, or if we do not have access to a sufficient number of compliant cars to transport required volumes under our existing contracts, our operations may be negatively affected. This may lead to a decrease in revenues and other consequences.
The adoption of additional federal, state, provincial or local laws or regulations, including any voluntary measures by the rail industry regarding railcar design or crude oil and liquid hydrocarbon rail transport activities, or efforts by local communities to restrict or limit rail traffic involving crude oil, could affect our business by increasing compliance costs and decreasing demand for our services, which could adversely affect our financial position and cash flows. Moreover, any disruptions in the operations of railroads, including those due to shortages of railcars, weather-related problems, flooding, drought, accidents, mechanical difficulties, strikes, lockouts or bottlenecks, could adversely impact our customers’ ability to move their product and, as a result, could affect our business.
Because we depend on Class I railroads for a significant portion of our operations in North America, our results of operations, financial condition and liquidity may be adversely affected if our relationships with these carriers deteriorate.
The railroad industry in the United States and Canada is dominated by seven Class I carriers that have substantial market control and negotiating leverage. In addition, Class I carriers also traditionally have been significant sources of business for us, and may be future sources of potential acquisition candidates as they divest branch lines. A decision by any of these Class I carriers to cease or re-route certain freight movements or to alter existing business relationships, including operational or relationship changes, could have a material adverse effect on our results of operations. The overall impact of any such decision would depend on which Class I carrier is involved, the routes and freight movements affected, as well as the nature of any changes.
We may be affected by fluctuating prices for fuel and energy.
Volatility in energy prices could have a significant effect on a variety of items including, but not limited to: the economy;economy and demand for transportation services; business related to the energy sector, including the production and processing of crude oil, natural gas, and coal; fuel prices; and, fuel surcharges. Particularly in our rail business, fuel costs constitute a significant portion of our expenses. Diesel fuel prices and availability can be subject to dramatic fluctuations, and significant price increases could have a material adverse effect on our operating results. If a severe fuel supply shortage arose from production curtailments, disruption of oil imports or domestic oil production, disruption of domestic refinery production, damage to refinery or pipeline infrastructure, political unrest, war, terrorist attack or otherwise, diesel fuel may not be readily available and may be subject to rationing regulations. Currently, we receive fuel surcharges and other rate adjustments to offset fuel prices, although there may be a significant delay in our recovery of fuel costs based on the terms of the fuel surcharge program. If Class I railroads change their policies regarding fuel surcharges, the compensation we receive for increases in fuel costs may decrease, which could have a negative effect on our profitability; in fact, we cannot be certain that we will always be able to mitigate rising or elevated fuel costs through fuel surcharges at all, as future market conditions or legislative or regulatory activities could adversely affect our ability to apply fuel surcharges or adequately recover increased fuel costs through fuel surcharges.services.
International, political, and economic factors, events and conditions, including current sanctions against Russia related to its invasion of Ukraine, affect the volatility of fuel prices and supplies. Weather can also affect fuel supplies and limit domestic refining capacity. A severe shortage of, or disruption to, domestic fuel supplies could have a material adverse effect on our results of operations, financial condition, and liquidity.
Our assets generally require routine maintenance, and we may be exposed to unforeseen maintenance costs.
We may be exposed to unforeseen maintenance costs for our assets associated with a lessee’s failure to properly maintain the asset. We enter into leases with respect to some of our assets pursuant to which the lessees are primarily responsible for many obligations, which generally include complying with all governmental requirements applicable to the lessee, including operational, maintenance, government agency oversight, registration requirements and other applicable directives. Failure of a lessee to perform required maintenance during the term of a lease could result in a decrease in value of an asset, an inability to re-lease an asset at favorable rates, if at all, or a potential inability to utilize an asset. Maintenance failures would also likely require us to incur maintenance and modification costs upon the termination of the applicable lease; such costs to restore the asset to an acceptable condition prior to re-leasing or sale could be substantial. Any failure by our lessees to meet their obligations to perform required scheduled maintenance or our inability to maintain our assets could materially adversely affect our business, prospects, financial condition, results of operations and cash flows.
Some of our customers operate in highly regulated industries and changes in laws or regulations, including laws with respect to international trade, may adversely affect our ability to lease or sell our assets.
Some of our customers operate in highly regulated industries. A number of our contractual arrangements-for example, our leasing aircraft engines to third-party operators-require the operator (our customer) to obtain specific governmental or regulatory licenses, consents or approvals. These include consents for certain payments under such arrangements and for the export, import or re-export of the related assets. Failure by our customers or, in certain circumstances, by us, to obtain certain licenses and approvals could negatively affect our ability to conduct our business. In addition, the shipment of goods, services and technology across international borders subjects the operation of our assets to international trade laws and regulations. Moreover, many countries, including the United States, control the export and re-export of certain goods, services and technology and impose related export recordkeeping and reporting obligations. Governments also may impose economic sanctions against certain countries, persons and other entities that may restrict or prohibit transactions involving such countries, persons and entities. If any such regulations or sanctions affect the asset operators that are our customers, our business, prospects, financial condition, results of operations and cash flows may be materially adversely affected.
Certain of our assets are subject to purchase options held by the lessee of the asset which, if exercised, could reduce the size of our asset base and our future revenues.
We have granted purchase options to the lessees of certain of our assets. The market values of these assets may change from time to time depending on a number of factors, such as general economic and market conditions affecting the industries in which we operate, competition, cost of construction, governmental or other regulations, technological changes and prevailing levels of lease rates from time to time. The purchase price under a purchase option may be less than the asset’s market value at the time the option may be exercised. In addition, we may not be able to obtain a replacement asset for the price at which the asset is sold. In such cases, our business, prospects, financial condition, results of operations and cash flows may be materially adversely affected.
We may not be able to renew or obtain new or favorable leases, which could adversely affect our business, prospects, financial condition, results of operations and cash flows.
Our operating leases are subject to greater residual risk than direct finance leases because we will own the assets at the expiration of an operating lease term and we may be unable to renew existing leases at favorable rates, or at all, or sell the leased assets, and the residual value of the asset may be lower fuel pricesthan anticipated. In addition, our ability to renew existing leases or obtain new leases will also depend on prevailing market conditions, and upon expiration of the contracts governing the leasing of the applicable assets, we may be exposed to increased volatility in terms of rates and contract provisions. Our customers may reduce their activity levels or seek to terminate or renegotiate their leases with us. If we are not able to renew or obtain new leases in direct continuation, or if new leases are entered into at rates substantially below the existing rates or on terms otherwise less favorable compared to existing contractual terms, or if we are unable to sell assets for which we are unable to obtain new contracts or leases, our business, prospects, financial condition, results of operations and cash flows could be materially adversely affected.
Litigation to enforce our contracts and recover our assets has inherent uncertainties that are increased by the location of our assets in jurisdictions that have less developed legal systems.
While some of our contractual arrangements are governed by New York law and provide for the non-exclusive jurisdiction of the courts located in the state of New York, our ability to enforce our counterparties’ obligations under such contractual arrangements is subject to applicable laws in the jurisdiction in which enforcement is sought. While some of our existing assets are used in specific jurisdictions, aviation assets by their nature generally move throughout multiple jurisdictions in the ordinary course of business. As a result, it is not possible to predict, with any degree of certainty, the jurisdictions in which enforcement proceedings may be commenced. Litigation and enforcement proceedings have inherent uncertainties in any jurisdiction and are expensive. These uncertainties are enhanced in countries that have less developed legal systems where the interpretation of laws and regulations is not consistent, may be influenced by factors other than legal merits and may be cumbersome, time-consuming and even more expensive. For example, repossession from defaulting lessees may be difficult and more expensive in jurisdictions whose laws do not confer the same security interests and rights to creditors and lessors as those in the United States and where the legal system is not as well developed. As a result, the remedies available and the relative success and expedience of collection and enforcement proceedings with respect to the owned assets in various jurisdictions cannot be predicted. To the extent more of our business shifts to areas outside of the United States and Europe, such as Asia and the Middle East, it may become more difficult and expensive to enforce our rights and recover our assets.
Our international operations involve additional risks, which could adversely affect our business, prospects, financial condition, results of operations and cash flows.
We and our customers operate in various regions throughout the world. As a result, we may, directly or indirectly, be exposed to political and other uncertainties, including risks of:
terrorist acts, armed hostilities, war and civil disturbances;
potential cybersecurity attacks;
significant governmental influence over many aspects of local economies;
seizure, nationalization or expropriation of property or equipment;
repudiation, nullification, modification or renegotiation of contracts;
limitations on insurance coverage, such as war risk coverage, in certain areas;
foreign and U.S. monetary policy and foreign currency fluctuations and devaluations;
the inability to repatriate income or capital;
complications associated with repairing and replacing equipment in remote locations;
import-export quotas, wage and price controls, imposition of trade barriers;
U.S. and foreign sanctions or trade embargoes;
restrictions on the transfer of funds into or out of countries in which we operate;
compliance with U.S. Treasury sanctions regulations restricting doing business with certain nations or specially designated nationals;
regulatory or financial requirements to comply with foreign bureaucratic actions;
compliance with applicable anti-corruption laws and regulations;
changing taxation policies, including confiscatory taxation;
other forms of government regulation and economic conditions that are beyond our control; and
Any of these or other risks could adversely impact our customers’ international operations which could materially adversely impact our operating results and growth opportunities.
We may make acquisitions in emerging markets throughout the world, and investments in emerging markets are subject to greater risks than developed markets and could adversely affect our business, prospects, financial condition, results of operations and cash flows.
To the extent that we acquire assets in emerging markets-which we may do throughout the world-additional risks may be encountered that could adversely affect our business. Emerging market countries have less developed economies and infrastructure and are often more vulnerable to economic and geopolitical challenges and may experience significant fluctuations in gross domestic product, interest rates and currency exchange rates, as well as civil disturbances, government instability, nationalization and expropriation of private assets and the imposition of taxes or other charges by government authorities. In addition, the currencies in which investments are denominated may be unstable, may be subject to significant depreciation and may not be freely convertible or may be subject to the imposition of other monetary or fiscal controls and restrictions.
Emerging markets are still in relatively early stages of their development and accordingly may not be highly or efficiently regulated. Moreover, emerging markets tend to be shallower and less liquid than more established markets which may adversely affect our ability to realize profits from our assets in emerging markets when we desire to do so or receive what we perceive to be their fair value in the event of a realization. In some cases, a market for realizing profits from an investment may not exist locally. In addition, issuers based in emerging markets are not generally subject to uniform accounting and financial reporting standards, practices and requirements comparable to those applicable to issuers based in more developed countries, thereby potentially increasing the risk of fraud and other deceptive practices. Settlement of transactions may be subject to greater delay and administrative uncertainties than in developed markets and less complete and reliable financial and other information may be available to investors in emerging markets than in developed markets. In addition, economic instability in emerging markets could adversely affect the value of our assets subject to leases in such countries, or the ability of our lessees, which operate in these markets, to meet their contractual obligations. As a result, lessees that operate in emerging market countries may be more likely to default under their contractual obligations than those that operate in developed countries. Liquidity and volatility limitations in these markets may also adversely affect our ability to dispose of our assets at the best price available or in a timely manner.
As we have and may continue to acquire assets located in emerging markets throughout the world, we may be exposed to any one or a combination of these risks, which could adversely affect our operating results.
We are actively evaluating potential acquisitions of assets and operating companies in other aviation sectors which could result in additional risks and uncertainties for our business and unexpected regulatory compliance costs.
While our existing portfolio consists of assets in the aviation sector, we are actively evaluating potential acquisitions of assets and operating companies in other sectors of the aviation market and we plan to be flexible as other attractive opportunities arise over time. To the extent we make acquisitions in other sectors, we will face numerous risks and uncertainties, including risks associated with the required investment of capital and other resources and with combining or integrating operational and management systems and controls. Entry into certain lines of business may subject us to new laws and regulations and may lead to increased litigation and regulatory risk. Many types of transportation assets, including certain airport assets, are subject to registration requirements by U.S. governmental agencies, as well as foreign governments if such assets are to be used outside of the United States. Failing to register the assets, or losing such registration, could result in substantial penalties, forced liquidation of the assets and/or the inability to operate and, if applicable, lease the assets. We may need to incur significant costs to comply with the laws and regulations applicable to any such new acquisition. The failure to comply with these laws and regulations could cause us to incur significant costs, fines or penalties or require the assets to be removed from service for a period of time resulting in reduced income from these assets. In addition, if our acquisitions in other sectors produce insufficient revenues, or produce investment losses, or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected, and our reputation and business may be harmed.
The agreements governing our indebtedness place restrictions on us and our subsidiaries, reducing operational flexibility and creating default risks.
The agreements governing our indebtedness, including, but not limited to, the indenture governing our Senior Notes and the amended and restated revolving credit facility entered into on December 2, 2021 (as amended by Amendment No. 1 dated as of April 28, 2022 and Amendment No. 2 dated as of September 20, 2022, the “Revolving Credit Facility”), contain covenants that place restrictions on us and our subsidiaries. The indentures governing our Senior Notes and the Revolving Credit Facility restrict among other things, our and certain of our subsidiaries’ ability to:
merge, consolidate or transfer all, or substantially all, of our assets;
incur additional debt or issue preferred shares;
make certain investments or acquisitions;
create liens on our or our subsidiaries’ assets;
make distributions on or repurchase our shares;
enter into transactions with affiliates; and
create dividend restrictions and other payment restrictions that affect our subsidiaries.
These covenants could impair our ability to grow our business, take advantage of attractive business opportunities, pay dividends on our ordinary shares or successfully compete. A breach of any of these covenants could result in an event of default. Cross-default provisions in our debt agreements could cause an event of default under one debt agreement to trigger an event of default under our other debt agreements. Upon the occurrence of an event of default under any of our debt agreements, the lenders or holders thereof could elect to declare all outstanding debt under such agreements to be immediately due and payable.
Terrorist attacks or other hostilities could negatively impact our operations and our profitability and may expose us to liability and reputational damage.
Terrorist attacks may negatively affect our operations. Such attacks have contributed to economic instability in the United States and elsewhere, and further acts of terrorism, violence or war could similarly affect world trade and the industries in which we and our customers operate. In addition, terrorist attacks or hostilities may directly impact airports or aircraft, or our physical facilities or those of our customers. In addition, it is also possible that our assets could be involved in a terrorist attack or other hostilities. The consequences of any terrorist attacks or hostilities are unpredictable, and we may not be able to foresee events that could have a negative impactmaterial adverse effect on commoditiesour operations. Although our lease agreements generally require the counterparties to indemnify us against all damages arising out of the use of our assets, and we processcarry insurance to potentially offset any costs in the event that our customer indemnifications prove to be insufficient, our insurance does not cover certain types of terrorist attacks, and transport,we may not be fully protected from liability or the reputational damage that could arise from a terrorist attack which utilizes our assets.
Our leases require payments in U.S. dollars, but many of our customers operate in other currencies; if foreign currencies devalue against the U.S. dollar, our lessees may be unable to meet their payment obligations to us in a timely manner.
Our current leases typically require that payments be made in U.S. dollars. If the currency that our lessees typically use in operating their businesses devalues against the U.S. dollar, our lessees could encounter difficulties in making payments to us in U.S. dollars. Furthermore, many foreign countries have currency and exchange laws regulating international payments that may impede or prevent payments from being paid to us in U.S. dollars. Future leases may provide for payments to be made in euros or other foreign currencies. Any change in the currency exchange rate that reduces the amount of U.S. dollars obtained by us upon conversion of future lease payments denominated in euros or other foreign currencies, may, if not appropriately hedged by us, have a material adverse effect on us and increase the volatility of our earnings.
Our inability to obtain sufficient capital would constrain our ability to grow our portfolio and to increase our revenues.
Our business is capital intensive, and we have used and may continue to employ leverage to finance our operations. Accordingly, our ability to successfully execute our business strategy and maintain our operations depends on the availability and cost of debt and equity capital. Additionally, our ability to borrow against our assets is dependent, in part, on the appraised value of such assets. If the appraised value of such assets declines, we may be required to reduce the principal outstanding under our debt facilities or otherwise be unable to incur new borrowings.
We can give no assurance that the capital we need will be available to us on favorable terms, or at all. Our inability to obtain sufficient capital, or to renew or expand our credit facilities, could result in increased funding costs and would limit our ability to:
meet the terms and maturities of our existing and future debt facilities;
purchase new assets or refinance existing assets;
fund our working capital needs and maintain adequate liquidity; and
finance other growth initiatives.
In addition, we conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act of 1940 (the “Investment Company Act”). As such, certain forms of financing such as crude oilfinance leases may not be available to us. Please see “Risks Related to Our Business.” If we are deemed an investment company under the Investment Company Act, it could have a material adverse effect on our business, prospects, financial condition, results of operations and petroleum products,cash flows.”
The effects of various environmental regulations may negatively affect the industries in which we operate which could have a material adverse effect on our financial condition, results of operations and cash flows.
We are subject to federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants to air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and noise and emission levels and greenhouse gas emissions. Legislative and regulatory measures currently under consideration or being implemented by government authorities to address climate change could require reductions in our greenhouse gas or other emissions, establish a carbon tax or increase fuel or energy taxes. These legal requirements are expected to result in increased capital expenditures and compliance costs, and could result in higher costs and may require us to acquire emission credits or carbon offsets. These costs and restrictions could harm our business and results of operations by increasing our expenses or requiring us to alter our operations. The inconsistent international, regional and/or national requirements associated with climate change regulations also create economic and regulatory uncertainty.
Under some environmental laws in the United States and certain other countries, strict liability may be imposed on the owners or operators of assets, which could render us liable for environmental and natural resource damages without regard to negligence or fault on our part. We could incur substantial costs, including cleanup costs, fines and third-party claims for property damage and personal injury, as a result of violations of or liabilities under environmental laws and regulations in connection with our or our lessee’s current or historical operations, any of which could have a material adverse effect on our results of operations and financial condition,condition. In addition, a variety of new legislation is being enacted, or considered for enactment, at the federal, state and liquidity.
Transtar faces competition fromlocal levels relating to greenhouse gas emissions and climate change. While there has historically been a lack of consistent climate change legislation, as climate change concerns continue to grow, further legislation and regulations are expected to continue in areas such as greenhouse gas emissions control, emission disclosure requirements and building codes or other railroadsinfrastructure requirements that impose energy efficiency standards. Government mandates, standards or regulations intended to mitigate or reduce greenhouse gas emissions or projected climate change impacts could result in increased energy and transportation costs, and increased compliance expenses and other transportation providers.
Transtar faces competitionfinancial obligations to meet permitting or development requirements that we may be unable to fully recover (due to market conditions or other factors), any of which could result in reduced profits and adversely affect our results of operations. While we typically maintain liability insurance coverage and typically require our lessees to provide us with indemnity against certain losses, the insurance coverage is subject to large deductibles, limits on maximum coverage and significant exclusions and may not be sufficient or available to protect against any or all liabilities and such indemnities may not cover or be sufficient to protect us against losses arising from other railroads, motor carriers, ships, barges, and pipelines. We operate in some corridors served by other railroads and motor carriers.environmental damage. In addition, changes to price competition,environmental standards or regulations in the industries in which we face competition with respectoperate could limit the economic life of the assets we acquire or reduce their value, and also require us to transit times, quality,make significant additional investments in order to maintain compliance, which would negatively impact our cash flows and reliabilityresults of service from motor carriers and other railroads. Motor carriers in particular canoperations.
The discontinuation of the LIBOR benchmark interest rate may have an advantage over railroadsimpact on our business.
On July 27, 2017, the U.K. Financial Conduct Authority (the "FCA"), which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR rates after 2021. On November 30, 2020, ICE Benchmark Administration, or the IBA, the administrator of LIBOR, with respectthe support of the United States Federal Reserve and the FCA, announced plans to transit timesconsult on ceasing publication of LIBOR on December 31, 2021, for only the one-week and timelinesstwo-month LIBOR tenors, and on June 30, 2023, for all other LIBOR tenors. The U.S. Federal Reserve concurrently issued a statement advising banks to stop new LIBOR issuances by the end of service. However, railroads are much more fuel-efficient than trucks,2021. The IBA ceased publication of one-week and two-month USD LIBOR settings after December 31, 2021, and intends to cease publishing the remaining USD LIBOR settings after June 30, 2023.
In the United States, the Alternative Reference Rate Committee (“ARRC”), a group of diverse private-market participants assembled by the Federal Reserve Board and the Federal Reserve Bank of New York, was tasked with identifying alternative reference rates to replace LIBOR. The Secured Overnight Finance Rate (“SOFR”) has emerged as the ARRC's preferred alternative rate for LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities in the repurchase agreement market. At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates.
A cyberattack that bypasses our information technology (“IT”), security systems or the IT security systems of our third-party providers, causing an IT security breach, may lead to a disruption of our IT systems and the loss of business information which reduces the impactmay hinder our ability to conduct our business effectively and may result in lost revenues and additional costs.
Parts of transporting goodsour business depend on the environment and public infrastructure. Additionally, we must build or acquire and maintain our rail system, while trucks, barges, and maritime operators are able to use public rights-of-way maintained by public entities. Any of the following could also affect the competitivenesssecure operation of our rail services, whichIT systems and the IT systems of our third-party providers to manage, process, store, and transmit information associated with aircraft leasing. We have, from time to time, experienced threats to our data and systems, including malware and computer virus attacks. A cyberattack that bypasses our IT security systems or the IT security systems of our third-party providers, causing an IT security breach, could adversely impact our daily operations and lead to the loss of sensitive information, including our own proprietary information and that of our customers, suppliers and employees. Such losses could harm our reputation and result in competitive disadvantages, litigation, regulatory enforcement actions, lost revenues, additional costs and liabilities. While we devote substantial resources to maintaining adequate levels of cyber-security, our resources and technical sophistication may not be adequate to prevent all types of cyberattacks.
If we are deemed an “investment company” under the Investment Company Act, it could have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows.
We conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act. Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Excluded from the term “investment securities,” among other things, are U.S. government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company for certain privately-offered investment vehicles set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
We are a holding company that is not an investment company because we are engaged in the business of holding securities of our wholly-owned and majority-owned subsidiaries, which are engaged in transportation and related businesses which lease assets pursuant to operating leases and finance leases. The Investment Company Act may limit our and our subsidiaries’ ability to enter into financing leases and engage in other types of financial condition,activity because less than 40% of the value of our and liquidity: (i) improvementsour subsidiaries’ total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis can consist of “investment securities.”
If we or expenditures materially increasingany of our subsidiaries were required to register as an investment company under the qualityInvestment Company Act, the registered entity would become subject to substantial regulation that would significantly change our operations, and we would not be able to conduct our business as described in this report. We have not obtained a formal determination from the SEC as to our status under the Investment Company Act and, consequently, any violation of the Investment Company Act would subject us to material adverse consequences.
Because we are incorporated under the laws of the Cayman Islands, you may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited.
We are an exempted company incorporated under the laws of the Cayman Islands. As a result, it may be difficult for investors to effect service of process within the United States upon our directors or reducingofficers, or enforce judgments obtained in the costsUnited States courts against our directors or officers.
Our corporate affairs are governed by our amended and restated memorandum and articles of these alternative modesassociation (as amended from time to time, the ‘‘Articles’’), the Companies Act (As Revised) of transportation,the Cayman Islands (the ‘‘Cayman Companies Act’’) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority, but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are different from what they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a different body of securities laws as compared to the United States, and certain states, such as autonomous orDelaware, may have more fuel efficient trucks, (ii) legislation that eliminates or significantly increases the size or weight limitations appliedfully developed and judicially interpreted bodies of corporate law. In addition, Cayman Islands companies may not have standing to motor carriers, or (iii) legislation or regulatory changes that impose operating restrictions on railroads or that adversely affect the profitability of some or all railroad traffic. Additionally, any future consolidationinitiate a shareholders derivative action in a federal court of the rail industry could materially affectUnited States.
We have been advised by Maples and Calder (Cayman) LLP, our competitive environment.Cayman Islands legal counsel, that the courts of the Cayman Islands are unlikely (1) to recognize or enforce against us judgments of courts of the United States predicated upon the civil liability provisions of the federal securities laws of the United States or any state; and (2) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability provisions of the federal securities laws of the United States or any state, so far as the liabilities imposed by those provisions are penal in nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a United States company.
The Financial Action Task Force has increased monitoring of the Cayman Islands.
In February 2021, the Cayman Islands was added to the Financial Action Task Force (‘‘FATF’’) list of jurisdictions whose anti-money laundering/counter-terrorist and proliferation financing practices are under increased monitoring, commonly referred to as the ‘‘FATF grey list.’’ The FATF was established in July 1989 by a Group of Seven (G-7) Summit and is a task force composed of member governments who agree to fund the FATF on temporary basis with specific goals and projects– it is an international policy-making body that sets international anti-money laundering standards and counter-terrorist financing measures. The FATF monitors countries to ensure they implement the FATF Standards fully and effectively, and holds countries to account that do not comply. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring during that timeframe. In its October 2021 plenary, the FATF positively recognized the ongoing efforts of the Cayman Islands to improve its anti-money laundering and counter-terrorist financing regime. Despite the progress the Cayman Islands is making on satisfying the final outstanding recommendations (being considered as compliant or largely compliant with all of the FATF’s 40 recommendations and having completed 60 out of 63 FATF recommendation actions), it is still unclear how long this designation will remain in place and what ramifications, if any, the designation will have for the Company.
EU AML High-Risk Third Countries List
On March 13, 2022, the European Commission (‘‘EC’’) updated its list of ’high-risk third countries’ (‘‘EU AML List’’) identified as having strategic deficiencies in their anti-money laundering/counter-terrorist financing regimes to add nine countries, including the Cayman Islands. The EC has noted it is committed to there being a greater alignment between the EU AML List and the FATF listing process. The addition of the Cayman Islands to the EU AML List is a direct result of the inclusion of the Cayman Islands on the FATF grey list in February 2021. It is unclear how long this designation will remain in place and what ramifications, if any, the designation will have for the Company.
Our assets are exposed to unplanned interruptions caused by events outside of our control which may disrupt our business and cause damage or losses that may not be adequately covered by insurance.
The operations of transportation and infrastructure
Aviation projects are exposed to unplanned interruptions caused by breakdown or failure of equipment, or plants, aging infrastructure, employee error or contractor or subcontractor failure, problems that delay or increase the cost of returning facilities to service after outages, limitations that may be imposed by equipment conditions or environmental, safety or other regulatory requirements, fuel supply or fuel transportation reductions or interruptions, labor disputes, difficulties with the implementation or operation of information systems, derailments, power outages, pipeline or electricity line ruptures, catastrophic events, such as hurricanes, cyclones, earthquakes, landslides, floods, explosions, fires, or other disasters. Any equipment or system outage or constraint can, among other things, reduce sales, increase costs and affect the ability to meet regulatory service metrics, customer expectations and regulatory reliability and security requirements. We have in the past experienced power outages at plants which disrupted their operations and negatively impacted our revenues. We cannot assure you that similar events may not occur in the future. Operational disruption, as well as supply disruption, and increased government oversight could adversely impact the cash flows available from these assets. In addition, the cost of repairing or replacing damaged assets could be considerable. Repeated or prolonged interruption may result in temporary or permanent loss of customers, substantial litigation or penalties for regulatory or contractual non-compliance, and any loss from such events may not be recoverable under relevant insurance policies. Although we believe that we are adequately insured against these types of events, either indirectly through our lessees or charterers or through our own insurance policies, no assurance can be given that the occurrence of any such event will not materially adversely affect us. In addition, if a lessee or charterer is not obligated to maintain sufficient insurance, we may incur the costs of additional insurance coverage during the related lease or charter.lease. We can give no assurance that such insurance will be available at commercially reasonable rates, if at all.
Our assets generally require routine maintenance, and we may be exposed to unforeseen maintenance costs.
We may be exposed to unforeseen maintenance costs for our assets associated with a lessee’s or charterer’s failure to properly maintain the asset. We enter into leases and charters with respect to some of our assets pursuant to which the lessees are primarily responsible for many obligations, which generally include complying with all governmental requirements applicable to the lessee or charterer, including operational, maintenance, government agency oversight, registration requirements and other applicable directives. Failure of a lessee or charterer to perform required maintenance during the term of a lease or charter could result in a decrease in value of an asset, an inability to re-lease or charter an asset at favorable rates, if at all, or a potential inability to utilize an asset. Maintenance failures would also likely require us to incur maintenance and modification costs upon the termination of the applicable lease or charter; such costs to restore the asset to an acceptable condition prior to re-leasing, charter or sale could be substantial. Any failure by our lessees or charterers to meet their obligations to perform required scheduled maintenance or our inability to maintain our assets could materially adversely affect our business, prospects, financial condition, results of operations and cash flows.
Some of our customers operate in highly regulated industries and changes in laws or regulations, including laws with respect to international trade, may adversely affect our ability to lease, charter or sell our assets.
Some of our customers operate in highly regulated industries such as aviation and offshore energy. A number of our contractual arrangements-for example, our leasing aircraft engines or offshore energy equipment to third-party operators-require the operator (our customer) to obtain specific governmental or regulatory licenses, consents or approvals. These include consents for certain payments under such arrangements and for the export, import or re-export of the related assets. Failure by our customers or, in certain circumstances, by us, to obtain certain licenses and approvals could negatively affect our ability to conduct our business. In addition, the shipment of goods, services and technology across international borders subjects the operation of our assets to international trade laws and regulations. Moreover, many countries, including the United States, control the export and re-export of certain goods, services and technology and impose related export recordkeeping and reporting obligations. Governments also may impose economic sanctions against certain countries, persons and other entities that may restrict or prohibit transactions involving such countries, persons and entities. If any such regulations or sanctions affect the asset operators that are our customers, our business, prospects, financial condition, results of operations and cash flows may be materially adversely affected.
Certain of our assets are subject to purchase options held by the charterer or lessee of the asset which, if exercised, could reduce the size of our asset base and our future revenues.
We have granted purchase options to the charterers and lessees of certain of our assets. The market values of these assets may change from time to time depending on a number of factors, such as general economic and market conditions affecting the industries in which we operate, competition, cost of construction, governmental or other regulations, technological changes and prevailing levels of charter or lease rates from time to time. The purchase price under a purchase option may be less than the asset’s market value at the time the option may be exercised. In addition, we may not be able to obtain a replacement asset for the price at which the asset is sold. In such cases, our business, prospects, financial condition, results of operations and cash flows may be materially adversely affected.
The profitability of our offshore energy assets may be impacted by the profitability of the offshore oil and gas industry generally, which is significantly affected by, among other things, volatile oil and gas prices.
Demand for assets in the offshore energy business and our ability to secure charter contracts for our assets at favorable charter rates following expiry or termination of existing charters will depend, among other things, on the level of activity in the offshore oil and gas industry. The offshore oil and gas industry is cyclical and volatile, and demand for oil-service assets depends on, among other things, the level of development and activity in oil and gas exploration, as well as the identification and development of oil and gas reserves and production in offshore areas worldwide. The availability of high quality oil and gas prospects, exploration success, relative production costs, the stage of reservoir development, political concerns and regulatory requirements all affect the level of activity for charterers of oil-service vessels. Accordingly, oil and gas prices and market expectations of potential changes in these prices significantly affect the level of activity and demand for oil-service assets. Oil and gas prices can be extremely volatile and are affected by numerous factors beyond our control, such as: worldwide demand for oil and gas; costs of exploring, developing, producing and delivering oil and gas; expectations regarding future energy prices; the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and impact pricing; the level of production in non-OPEC countries; governmental regulations and policies regarding development of oil and gas reserves; local and international political, economic and weather conditions; domestic and foreign tax or trade policies; political and military conflicts in oil-producing and other countries; and the development and exploration of alternative fuels. Any reduction in the demand for our assets due to these or other factors could materially adversely affect our operating results and growth prospects.
We may not be able to renew or obtain new or favorable charters or leases, which could adversely affect our business, prospects, financial condition, results of operations and cash flows.
Our operating leases are subject to greater residual risk than direct finance leases because we will own the assets at the expiration of an operating lease term and we may be unable to renew existing charters or leases at favorable rates, or at all, or sell the leased or chartered assets, and the residual value of the asset may be lower than anticipated. In addition, our ability to renew existing charters or leases or obtain new charters or leases will also depend on prevailing market conditions, and upon expiration of the contracts governing the leasing or charter of the applicable assets, we may be exposed to increased volatility in terms of rates and contract provisions. For example, we do not currently have long-term charters for our construction support vessel and our ROV support vessel. Likewise, our customers may reduce their activity levels or seek to terminate or renegotiate their charters or leases with us. If we are not able to renew or obtain new charters or leases in direct continuation, or if new charters or leases are entered into at rates substantially below the existing rates or on terms otherwise less favorable compared to existing contractual terms, or if we are unable to sell assets for which we are unable to obtain new contracts or leases, our business, prospects, financial condition, results of operations and cash flows could be materially adversely affected.
Litigation to enforce our contracts and recover our assets has inherent uncertainties that are increased by the location of our assets in jurisdictions that have less developed legal systems.
While some of our contractual arrangements are governed by New York law and provide for the non-exclusive jurisdiction of the courts located in the state of New York, our ability to enforce our counterparties’ obligations under such contractual arrangements is subject to applicable laws in the jurisdiction in which enforcement is sought. While some of our existing assets are used in specific jurisdictions, transportation and transportation-related infrastructure assets by their nature generally move throughout multiple jurisdictions in the ordinary course of business. As a result, it is not possible to predict, with any degree of certainty, the jurisdictions in which enforcement proceedings may be commenced. Litigation and enforcement proceedings have inherent uncertainties in any jurisdiction and are expensive. These uncertainties are enhanced in countries that have less developed legal systems where the interpretation of laws and regulations is not consistent, may be influenced by factors other than legal merits and may be cumbersome, time-consuming and even more expensive. For example, repossession from defaulting lessees may be difficult and more expensive in jurisdictions whose laws do not confer the same security interests and rights to creditors and lessors as those in the United States and where the legal system is not as well developed. As a result, the remedies available and the relative success and expedience of collection and enforcement proceedings with respect to the owned assets in various jurisdictions cannot be predicted. To the extent more of our business shifts to areas outside of the United States and Europe, such as Asia and the Middle East, it may become more difficult and expensive to enforce our rights and recover our assets.
Our international operations involve additional risks, which could adversely affect our business, prospects, financial condition, results of operations and cash flows.
We and our customers operate in various regions throughout the world. As a result, we may, directly or indirectly, be exposed to political and other uncertainties, including risks of:
•terrorist acts, armed hostilities, war and civil disturbances;
•acts of piracy;
•potential cybersecurity attacks;
•significant governmental influence over many aspects of local economies;
•seizure, nationalization or expropriation of property or equipment;
•repudiation, nullification, modification or renegotiation of contracts;
•limitations on insurance coverage, such as war risk coverage, in certain areas;
•political unrest;
•foreign and U.S. monetary policy and foreign currency fluctuations and devaluations;
•the inability to repatriate income or capital;
•complications associated with repairing and replacing equipment in remote locations;
•import-export quotas, wage and price controls, imposition of trade barriers;
•U.S. and foreign sanctions or trade embargoes;
•restrictions on the transfer of funds into or out of countries in which we operate;
•compliance with U.S. Treasury sanctions regulations restricting doing business with certain nations or specially designated nationals;
•regulatory or financial requirements to comply with foreign bureaucratic actions;
•compliance with applicable anti-corruption laws and regulations;
•changing taxation policies, including confiscatory taxation;
•other forms of government regulation and economic conditions that are beyond our control; and
•governmental corruption.
Any of these or other risks could adversely impact our customers’ international operations which could materially adversely impact our operating results and growth opportunities.
We may make acquisitions in emerging markets throughout the world, and investments in emerging markets are subject to greater risks than developed markets and could adversely affect our business, prospects, financial condition, results of operations and cash flows.
To the extent that we acquire assets in emerging markets-which we may do throughout the world-additional risks may be encountered that could adversely affect our business. Emerging market countries have less developed economies and infrastructure and are often more vulnerable to economic and geopolitical challenges and may experience significant fluctuations in gross domestic product, interest rates and currency exchange rates, as well as civil disturbances, government instability, nationalization and expropriation of private assets and the imposition of taxes or other charges by government authorities. In addition, the currencies in which investments are denominated may be unstable, may be subject to significant depreciation and may not be freely convertible or may be subject to the imposition of other monetary or fiscal controls and restrictions.
Emerging markets are still in relatively early stages of their development and accordingly may not be highly or efficiently regulated. Moreover, emerging markets tend to be shallower and less liquid than more established markets which may adversely affect our ability to realize profits from our assets in emerging markets when we desire to do so or receive what we perceive to be their fair value in the event of a realization. In some cases, a market for realizing profits from an investment may not exist locally. In addition, issuers based in emerging markets are not generally subject to uniform accounting and financial reporting standards, practices and requirements comparable to those applicable to issuers based in more developed countries, thereby potentially increasing the risk of fraud and other deceptive practices. Settlement of transactions may be subject to greater delay and administrative uncertainties than in developed markets and less complete and reliable financial and other information may be available to investors in emerging markets than in developed markets. In addition, economic instability in emerging markets could adversely affect the value of our assets subject to leases or charters in such countries, or the ability of our lessees or charters, which operate in these markets, to meet their contractual obligations. As a result, lessees or charterers that operate in emerging market countries may be more likely to default under their contractual obligations than those that operate in developed countries. Liquidity and volatility limitations in these markets may also adversely affect our ability to dispose of our assets at the best price available or in a timely manner.
As we have and may continue to acquire assets located in emerging markets throughout the world, we may be exposed to any one or a combination of these risks, which could adversely affect our operating results.
We are actively evaluating potential acquisitions of assets and operating companies in other transportation and infrastructure sectors which could result in additional risks and uncertainties for our business and unexpected regulatory compliance costs.
While our existing portfolio consists of assets in the aviation, energy, intermodal transport and port and rail sectors, we are actively evaluating potential acquisitions of assets and operating companies in other sectors of the transportation and transportation-related infrastructure and equipment markets and we plan to be flexible as other attractive opportunities arise over time. To the extent we make acquisitions in other sectors, we will face numerous risks and uncertainties, including risks associated with the required investment of capital and other resources and with combining or integrating operational and management systems and controls. Entry into certain lines of business may subject us to new laws and regulations and may lead to increased litigation and regulatory risk. Many types of transportation assets, including certain rail, airport and seaport assets, are subject to registration requirements by U.S. governmental agencies, as well as foreign governments if such assets are to be used outside of the United States. Failing to register the assets, or losing such registration, could result in substantial penalties, forced liquidation of the assets and/or the inability to operate and, if applicable, lease the assets. We may need to incur significant costs to comply with the laws and regulations applicable to any such new acquisition. The failure to comply with these laws and regulations could cause us to incur significant costs, fines or penalties or require the assets to be removed from service for a period of time resulting in reduced income from these assets. In addition, if our acquisitions in other sectors produce insufficient revenues, or produce investment losses, or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected, and our reputation and business may be harmed.
The agreements governing our indebtedness place restrictions on us and our subsidiaries, reducing operational flexibility and creating default risks.
The agreements governing our indebtedness, including, but not limited to, the indenture governing our Senior Notes and the revolving credit facility entered into on June 16, 2017 (“Revolving Credit Facility”), contain covenants that place restrictions on us and our subsidiaries. The indentures governing our Senior Notes and the Revolving Credit Facility restrict among other things, our and certain of our subsidiaries’ ability to:
•merge, consolidate or transfer all, or substantially all, of our assets;
•incur additional debt or issue preferred shares;
•make certain investments or acquisitions;
•create liens on our or our subsidiaries’ assets;
•sell assets;
•make distributions on or repurchase our shares;
•enter into transactions with affiliates; and
•create dividend restrictions and other payment restrictions that affect our subsidiaries.
These covenants could impair our ability to grow our business, take advantage of attractive business opportunities, pay dividends on our common and preferred shares or successfully compete. A breach of any of these covenants could result in an event of default. Cross-default provisions in our debt agreements could cause an event of default under one debt agreement to trigger an event of default under our other debt agreements. Upon the occurrence of an event of default under any of our debt agreements, the lenders or holders thereof could elect to declare all outstanding debt under such agreements to be immediately due and payable.
Terrorist attacks or other hostilities could negatively impact our operations and our profitability and may expose us to liability and reputational damage.
Terrorist attacks may negatively affect our operations. Such attacks have contributed to economic instability in the United States and elsewhere, and further acts of terrorism, violence or war could similarly affect world trade and the industries in which we and our customers operate. In addition, terrorist attacks or hostilities may directly impact airports or aircraft, ports where our containers and vessels travel, or our physical facilities or those of our customers. In addition, it is also possible that our assets could be involved in a terrorist attack or other hostilities. The consequences of any terrorist attacks or hostilities are unpredictable, and we may not be able to foresee events that could have a material adverse effect on our operations. Although our lease and charter agreements generally require the counterparties to indemnify us against all damages arising out of the use of our assets, and we carry insurance to potentially offset any costs in the event that our customer indemnifications prove to be insufficient, our insurance does not cover certain types of terrorist attacks, and we may not be fully protected from liability or the reputational damage that could arise from a terrorist attack which utilizes our assets.
Our leases and charters require payments in U.S. dollars, but many of our customers operate in other currencies; if foreign currencies devalue against the U.S. dollar, our lessees or charterers may be unable to meet their payment obligations to us in a timely manner.
Our current leases and charters require that payments be made in U.S. dollars. If the currency that our lessees or charterers typically use in operating their businesses devalues against the U.S. dollar, our lessees or charterers could encounter difficulties in making payments to us in U.S. dollars. Furthermore, many foreign countries have currency and exchange laws regulating international payments that may impede or prevent payments from being paid to us in U.S. dollars. Future leases or charters may provide for payments to be made in euros or other foreign currencies. Any change in the currency exchange rate that
reduces the amount of U.S. dollars obtained by us upon conversion of future lease payments denominated in euros or other foreign currencies, may, if not appropriately hedged by us, have a material adverse effect on us and increase the volatility of our earnings.
Our inability to obtain sufficient capital would constrain our ability to grow our portfolio and to increase our revenues.
Our business is capital intensive, and we have used and may continue to employ leverage to finance our operations. Accordingly, our ability to successfully execute our business strategy and maintain our operations depends on the availability and cost of debt and equity capital. Additionally, our ability to borrow against our assets is dependent, in part, on the appraised value of such assets. If the appraised value of such assets declines, we may be required to reduce the principal outstanding under our debt facilities or otherwise be unable to incur new borrowings.
We can give no assurance that the capital we need will be available to us on favorable terms, or at all. Our inability to obtain sufficient capital, or to renew or expand our credit facilities, could result in increased funding costs and would limit our ability to:
•meet the terms and maturities of our existing and future debt facilities;
•purchase new assets or refinance existing assets;
•fund our working capital needs and maintain adequate liquidity; and
•finance other growth initiatives.
In addition, we conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act of 1940 (the “Investment Company Act”). As such, certain forms of financing such as finance leases may not be available to us. Please see “- If we are deemed an investment company under the Investment Company Act, it could have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows.”
The effects of various environmental regulations may negatively affect the industries in which we operate which could have a material adverse effect on our financial condition, results of operations and cash flows.
We are subject to federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants to air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and noise and emission levels and greenhouse gas emissions. Under some environmental laws in the United States and certain other countries, strict liability may be imposed on the owners or operators of assets, which could render us liable for environmental and natural resource damages without regard to negligence or fault on our part. We could incur substantial costs, including cleanup costs, fines and third-party claims for property or natural resource damage and personal injury, as a result of violations of or liabilities under environmental laws and regulations in connection with our or our lessee’s or charterer’s current or historical operations, any of which could have a material adverse effect on our results of operations and financial condition. In addition, a variety of new legislation is being enacted, or considered for enactment, at the federal, state and local levels relating to greenhouse gas emissions and climate change. While there has historically been a lack of consistent climate change legislation, as climate change concerns continue to grow, further legislation and regulations are expected to continue in areas such as greenhouse gas emissions control, emission disclosure requirements and building codes or other infrastructure requirements that impose energy efficiency standards. Government mandates, standards or regulations intended to mitigate or reduce greenhouse gas emissions or projected climate change impacts could result in prohibitions or severe restrictions on infrastructure development in certain areas, increased energy and transportation costs, and increased compliance expenses and other financial obligations to meet permitting or development requirements that we may be unable to fully recover (due to market conditions or other factors), any of which could result in reduced profits and adversely affect our results of operations. While we typically maintain liability insurance coverage and typically require our lessees to provide us with indemnity against certain losses, the insurance coverage is subject to large deductibles, limits on maximum coverage and significant exclusions and may not be sufficient or available to protect against any or all liabilities and such indemnities may not cover or be sufficient to protect us against losses arising from environmental damage. In addition, changes to environmental standards or regulations in the industries in which we operate could limit the economic life of the assets we acquire or reduce their value, and also require us to make significant additional investments in order to maintain compliance, which would negatively impact our cash flows and results of operations.
Our Repauno site and Long Ridge property are subject to environmental laws and regulations that may expose us to significant costs and liabilities.
Our Repauno site is subject to ongoing environmental investigation and remediation by the former owner that sold Repauno to us (the “Repauno Seller”) related to historic industrial operations. The Repauno Seller is responsible for completion of this work, and we benefit from a related indemnity and insurance policy. If the Repauno Seller fails to fulfill its investigation and remediation, or indemnity obligations and the related insurance, which are subject to limits and conditions, fail to cover our costs, we could incur losses. Redevelopment of the property in those areas undergoing investigation and remediation must await state environmental agency confirmation that no further investigation or remediation is required before redevelopment activities can occur in such areas of the property. Therefore, any delay in the Repauno Seller’s completion of the environmental work or receipt of related approvals in an area of the property could delay our redevelopment activities. In addition, once received, permits and approvals may be subject to litigation, and projects may be delayed or approvals reversed or modified in litigation. If there is a delay in obtaining any required regulatory approval, it could delay projects and cause us to incur costs.
In connection with our acquisition of Long Ridge, the former owner that sold Long Ridge to us (the “Long Ridge Seller”) is obligated to perform certain post-closing demolition activities, remove specified containers, equipment and structures and conduct investigation, removal, cleanup and decontamination related thereto. The Long Ridge Seller is responsible for ongoing environmental remediation related to historic industrial operations on and off Long Ridge. In addition, Long Ridge is located adjacent to the former Ormet Corporation Superfund site (the “Ormet site”), which is owned and operated by the Long Ridge Seller. Pursuant to an order with the U.S. EPA, the Long Ridge Seller is obligated to pump groundwater that has been impacted by the adjacent Ormet site beneath our site and discharge it to the Ohio River and monitor the groundwater annually. Long Ridge is also subject to an environmental covenant related to the adjacent Ormet site that, inter alia, restricts the use of groundwater beneath our site and requires U.S. EPA consent for activities on Long Ridge that could disrupt the groundwater monitoring or pumping. The Long Ridge Seller is contractually obligated to complete its regulatory obligations on Long Ridge and we benefit from a related indemnity and insurance policy. If the Long Ridge Seller fails to fulfill its demolition, removal, investigation, remediation, monitoring, or indemnity obligations, and if the related insurance, which is subject to limits and conditions, fails to cover our costs, we could incur losses. Redevelopment of the property in those areas undergoing investigation and remediation pursuant to the Ohio EPA order must await state environmental agency confirmation that no further investigation or remediation is required before redevelopment activities can occur in such area of the property. Therefore, any delay in the Long Ridge Seller’s completion of the environmental work or receipt of related approvals or consents from Ohio EPA or U.S. EPA could delay our redevelopment activities.
In addition, a portion of Long Ridge was recently redeveloped as a combined cycle gas-fired electric generating facility, and other portions will likely be redeveloped in the future. Although we have not identified material impacts to soils or groundwater that reasonably would be expected to prevent or delay further redevelopment projects, impacted materials could be encountered that require special handling and/or result in delays to those projects. Any additional projects may require environmental permits and approvals from federal, state and local environmental agencies. Once received, permits and approvals may be subject to litigation, and projects may be delayed or approvals reversed or modified in litigation. If there is a delay in obtaining any required regulatory approval, it could delay projects and cause us to incur costs.
Moreover, new, stricter environmental laws, regulations or enforcement policies, including those imposed in response to climate change, could be implemented that significantly increase our compliance costs, or require us to adopt more costly methods of operation. If we are not able to transform Repauno or Long Ridge into hubs for industrial and energy development in a timely manner, their future prospects could be materially and adversely affected, which may have a material adverse effect on our business, operating results and financial condition.
The discontinuation of the LIBOR benchmark interest rate may have an impact on our business.
On July 27, 2017, the U.K. Financial Conduct Authority (the "FCA"), which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR rates after 2021. On November 30, 2020, ICE Benchmark Administration, or the IBA, the administrator of LIBOR, with the support of the United States Federal Reserve and the FCA, announced plans to consult on ceasing publication of LIBOR on December 31, 2021, for only the one-week and two-month LIBOR tenors, and on June 30, 2023, for all other LIBOR tenors. The U.S. Federal Reserve concurrently issued a statement advising banks to stop new LIBOR issuances by the end of 2021. The IBA ceased publication of one-week and two-month USD LIBOR settings after December 31, 2021, and intends to cease publishing the remaining USD LIBOR settings after June 30, 2023.
In the United States, the Alternative Reference Rate Committee (“ARRC”), a group of diverse private-market participants assembled by the Federal Reserve Board and the Federal Reserve Bank of New York, was tasked with identifying alternative reference rates to replace LIBOR. The Secured Overnight Finance Rate (“SOFR”) has emerged as the ARRC's preferred alternative rate for LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities in the repurchase agreement market. At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates.
As of June 30, 2022, we had $245.0 million of total debt outstanding under facilities with interest rates based on floating-rate indices. As a result of LIBOR’s phase out, our revolving credit facility was amended to incorporate SOFR as the successor rate to LIBOR, and our December 2021 bridge loan bears interest based on SOFR. There are significant differences between how LIBOR and SOFR are calculated, which could result in increased borrowing costs. We cannot predict to what extent the withdrawal and replacement of LIBOR will impact us. However, the implementation of alternative underlying floating-rate indices and reference rates may have an adverse impact on our business, results of operations or financial condition.
A cyberattack that bypasses our information technology (“IT”), security systems or the IT security systems of our third-party providers, causing an IT security breach, may lead to a disruption of our IT systems and the loss of business information which may hinder our ability to conduct our business effectively and may result in lost revenues and additional costs.
Parts of our business depend on the secure operation of our IT systems and the IT systems of our third-party providers to manage, process, store, and transmit information associated with aircraft leasing. We have, from time to time, experienced threats to our data and systems, including malware and computer virus attacks. A cyberattack that bypasses our IT security systems or the IT security systems of our third-party providers, causing an IT security breach, could adversely impact our daily operations and lead to the loss of sensitive information, including our own proprietary information and that of our customers, suppliers and employees. Such losses could harm our reputation and result in competitive disadvantages, litigation, regulatory
enforcement actions, lost revenues, additional costs and liabilities. While we devote substantial resources to maintaining adequate levels of cyber-security, our resources and technical sophistication may not be adequate to prevent all types of cyberattacks.
If we are deemed an “investment company” under the Investment Company Act, it could have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows.
We conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act. Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Excluded from the term “investment securities,” among other things, are U.S. government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company for certain privately-offered investment vehicles set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
We are a holding company that is not an investment company because we are engaged in the business of holding securities of our wholly-owned and majority-owned subsidiaries, which are engaged in transportation and related businesses which lease assets pursuant to operating leases and finance leases. The Investment Company Act may limit our and our subsidiaries’ ability to enter into financing leases and engage in other types of financial activity because less than 40% of the value of our and our subsidiaries’ total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis can consist of “investment securities.”
If we or any of our subsidiaries were required to register as an investment company under the Investment Company Act, the registered entity would become subject to substantial regulation that would significantly change our operations, and we would not be able to conduct our business as described in this report. We have not obtained a formal determination from the SEC as to our status under the Investment Company Act and, consequently, any violation of the Investment Company Act would subject us to material adverse consequences.
Risks Related to Our Acquisition of Transtar, LLC
Our acquisition of Transtar, LLC (“Transtar”) may not achieve its intended results and we may be unable to successfully integrate the operations of Transtar.
On July 28, 2021, we completed our previously announced acquisition of 100% of the equity interests of Transtar (the “Transtar Acquisition”), a wholly-owned short-line railroad subsidiary of United States Steel Corporation (the “Seller”). Transtar is comprised of five short-line freight railroads and one switching company, including two that connect to Seller’s largest production facilities in North America: the Gary Railway Company, Indiana; The Lake Terminal Railroad Company, Ohio; Union Railroad Company LLC, Pennsylvania; Fairfield Southern Company Inc., Alabama (switching company); Delray Connecting Railroad Company, Michigan; and the Texas & Northern Railroad Company, Texas. We are subject to certain risks relating to the Transtar Acquisition, which could have a material adverse effect on our business, results of operations and financial condition. Such risks may include, but are not limited to:
•failure to successfully integrate Transtar in a manner that permits us to realize the anticipated benefits of the acquisition;
•difficulties and delays integrating Transtar’s personnel, operations and systems and retaining key employees;
•higher than anticipated costs incurred in connection with the integration of the business and operations of Transtar;
•challenges in operating and managing rail lines across geographically disparate regions;
•disruptions to our ongoing business and diversions of our management’s attention caused by transition or integration activities involving Transtar;
•challenges with implementing adequate and appropriate controls, procedures and policies in Transtar’s business;
•Transtar’s dependence on the Seller as its primary customer;
•difficulties expanding our customer base;
•difficulties arising from Transtar’s dependence on the Seller to provide a variety of necessary transition services to Transtar and any failure by the Seller to adequately provide such services;
•assumption of pre-existing contractual relationships of Transtar that we may not have otherwise entered into, the termination or modification of which may be costly or disruptive to our business;
•incurring debt to finance the Transtar Acquisition, which increased our debt service requirements, expense and leverage;
•any potential litigation arising from the transaction; and
•other risks described in Item 1A, “Risk Factors” of this Annual Report on Form 10-K.
The successful integration of a new business also depends on our ability to manage the new business, realize forecasted synergies and full value from the combined business. Our business, results of operations, financial condition and cash flows could be materially adversely affected if we are unable to successfully integrate Transtar.
We have material customer concentration with respect to the Transtar business, with a limited number of customers accounting for a material portion of our revenues.
We earned approximately 12% of our revenue from one customer in the Transtar segment during the year ended December 31, 2021 (based on our period of ownership of Transtar).
There are inherent risks whenever a large percentage of total revenues are concentrated with a limited number of customers. It is not possible for us to predict the future level of demand for our services that will be generated by these customers or the future demand for the products and services of these customers in the end-user marketplace. In addition, revenues from these customers may fluctuate from time to time based on the commencement and completion of projects, the timing of which may be affected by market conditions or other factors, some of which may be outside of our control. If any of these customers experience declining or delayed sales due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our services or we could lose a major customer. Any such development could have an adverse effect on our margins and financial position, and would negatively affect our revenues and results of operations and/or trading price of our shares.
Risks Related to Our Manager
We are dependent on our Manager and other key personnel at Fortress and may not find suitable replacements if our Manager terminates the Management Agreement or if other key personnel depart.
Our officers and other individuals who perform services for us (other than Aviation, Jefferson, Repauno, Long Ridge and Transtar employees) are employees of our Manager or other Fortress entities. We are completely reliant on our Manager, which has significant discretion as to the implementation of our operating policies and strategies to conduct our business.business as a holding and operating company in the transportation sector. We are subject to the risk that our Manager will terminate the Management Agreement and that we will not be able to find a suitable replacement for our Manager in a timely manner, at a reasonable cost, or at all. Furthermore, we are dependent on the services of certain key employees of our Manager and certain key employees of Fortress entities whose compensation is partially or entirely dependent upon the amount of management fees earned by our Manager or the incentive allocationspayments distributed to the General PartnerMaster GP and whose continued service is not guaranteed, and the loss of such personnel or services could materially adversely affect our operations. We do not have key man insurance for any of the personnel of the Manager or other Fortress entities that are key to us. An inability to find a suitable replacement for any departing employee of our Manager or Fortress entities on a timely basis could materially adversely affect our ability to operate and grow our business.
In addition, our Manager may assign our Management Agreement to an entity whose business and operations are managed or supervised by Mr. Wesley R. Edens, who is a principal, Co-Chief Executive Officer and a member of the board of directors of Fortress, an affiliate of our Manager, and a member of the management committee of Fortress since co-founding Fortress in May 1998. In the event of any such assignment to a non-affiliate of Fortress, the functions currently performed by our Manager’s current personnel may be performed by others. We can give you no assurance that such personnel would manage our operations in the same manner as our Manager currently does, and the failure by the personnel of any such entity to acquire assets generating attractive risk-adjusted returns could have a material adverse effect on our business, financial condition, results of operations and cash flows.
On December 27, 2017, SoftBank completed its acquisition of Fortress (the “SoftBank Merger”).
In connection with the SoftBank Merger, Fortress operates within SoftBank as an independent business headquartered in New York.
There are conflicts of interest in our relationship with our Manager.
Our Management Agreement, the PartnershipServices and Profit Sharing Agreement and our operating agreementArticles were negotiated prior to our IPO and among affiliated parties, and their terms, including fees and other amounts payable, may not be as favorable to us as if they had been negotiated after our IPO with an unaffiliated third-party.
There are conflicts of interest inherent in our relationship with our Manager insofar as our Manager and its affiliates — including investment funds, private investment funds, or businesses managed by our Manager, including Seacastle Inc., Florida East Coast Industries, LLC (“FECI”) and FYX Trust Holdco LLC (“FYX”) — invest in transportation and transportation-related infrastructureaviation assets and whose investment objectives overlap with our asset acquisition objectives. Certain opportunities appropriate for us may also be appropriate for one or more of these other investment vehicles. Certain members of our board of directors and employees of our Manager who are our officers also serve as officers and/or directors of these other entities. For example, we have some of the sameour directors and officers as Seacastle Inc. and FYX.are also directors or officers of FTAI Infrastructure. Although we have the same Manager, we may compete with entities affiliated with our Manager or Fortress including Seacastle Inc., FECI and FYX, for certain target assets. From time to time, affiliates ofentities affiliated with or managed by our Manager or Fortress may focus on investments in assets with a similar profile as our target assets that we may seek to acquire. These affiliates may have meaningful purchasing capacity, which may change over time depending upon a variety of factors, including, but not limited to, available equity capital and debt financing, market conditions and cash on hand. Fortress has multiple existing and planned funds focused on investing in one or more of our target sectors, each with significant current or expected capital commitments. We have previously purchased and may in the future purchase assets from these funds, and have previously co-invested and may in the future co-invest with these funds in transportation and transportation-related infrastructureaviation assets. Fortress funds generally have a fee structure similar to ours, but the fees actually paid will vary depending on the size, terms and performance of each fund.
Our Management Agreement generally does not limit or restrict our Manager or its affiliates from engaging in any business or managing other operating companies similar to us or pooled investment vehicles that invest in assets that meet our asset acquisition objectives. Our Manager intends to engagehas also engaged in additional transportation and infrastructure related management with FTAI Infrastructure in our recent spin-off of our infrastructure assets, and may be involved in other investment opportunities in the future, including, but not limited to, the previously announced spin-offany of our infrastructure business, which may compete with us for investments or result in a change in our current investment strategy. In addition, our operating agreement providesArticles provide that if Fortress or an affiliate or any of their officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our shareholders or our affiliates. In the event that any of our directors and officers who is also a director, officer or employee of Fortress or its affiliates acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as a director or officer of FTAIthe Company and such person acts in good faith, then to the fullest extent permitted by law such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us if Fortress or its affiliates pursues or acquires the corporate opportunity or if such person did not present the corporate opportunity to us.
The ability of our Manager and its officers and employees to engage in other business activities, subject to the terms of our Management Agreement, may reduce the amount of time our Manager, its officers or other employees spend managing us. In addition, we may engage (subject to our strategy) in material transactions with our Manager or another entity managed by our Manager or one of its affiliates, including Seacastle Inc., FECI and FYX, which may include, but are not limited to, certain acquisitions, financing arrangements, purchases of debt, co-investments, consumer loans, servicing advances and other assets that present an actual, potential or perceived conflict of interest. Our board of directors adopted a policy regarding the approval of any “related person transactions” pursuant to which certain of the material transactions described above may require disclosure to, and approval by, the independent members of our board of directors. Actual, potential or perceived conflicts have given, and may in the future give, rise to investor dissatisfaction, litigation or regulatory inquiries or enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential, actual or perceived conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business in a number of ways, including causing an inability to raise additional funds, a reluctance of counterparties to do business with us, a decrease in the prices of our equity securities and a resulting increased risk of litigation and regulatory enforcement actions.
The structure of our Manager’s and the General Partner’sMaster GP’s compensation arrangements may have unintended consequences for us. We have agreed to pay our Manager a management fee and the General PartnerMaster GP is entitled to receive incentive allocationspayments from Holdcothe Company or its subsidiaries that are each based on different measures of performance. Consequently, there may be conflicts in the incentives of our Manager to generate attractive risk-adjusted returns for us. In addition, because the General PartnerMaster GP and our Manager are both affiliates of Fortress, the Income Incentive AllocationPayment paid to the General PartnerMaster GP may cause our Manager to place undue emphasis on the maximization of earnings, including through the use of leverage, at the expense of other objectives, such as preservation of capital, to achieve higher incentive allocations.payments. Investments with higher yield potential are generally riskier or more speculative than investments with lower yield potential. This could result in increased risk to the value of our portfolio of assets and our commonordinary shares.
If the spin-off of FTAI Infrastructure is completed, we expect that our Management Agreement will be amended and assigned to FTAI Infrastructure and that we will enter into a new management agreement under terms substantially similar to the terms of the Management Agreement.
Our directors have approved a broad asset acquisition strategy for our Manager and will not approve each acquisition we make at the direction of our Manager. In addition, we may change our strategy without a shareholder vote, which may result in our acquiring assets that are different, riskier or less profitable than our current assets.
Our Manager is authorized to follow a broad asset acquisition strategy. We may pursue other types of acquisitions as market conditions evolve. Our Manager makes decisions about our investments in accordance with broad investment guidelines adopted by our board of directors. Accordingly, we may, without a shareholder vote, change our target sectors and acquire a variety of assets that differ from, and are possibly riskier than, our current asset portfolio. Consequently, our Manager has great latitude in determining the types and categories of assets it may decide are proper investments for us, including the latitude to invest in types and categories of assets that may differ from those in our existing portfolio. Our directors will periodically review our strategy and our portfolio of assets. However, our board will not review or pre-approve each proposed acquisition or our related financing arrangements. In addition, in conducting periodic reviews, the directors will rely primarily on information provided to them by our Manager. Furthermore, transactions entered into by our Manager may be difficult or impossible to reverse by the time they are reviewed by the directors even if the transactions contravene the terms of the Management Agreement. In addition, we may change our asset acquisition strategy, including our target asset classes, without a shareholder vote.
Our asset acquisition strategy may evolve in light of existing market conditions and investment opportunities, and this evolution may involve additional risks depending upon the nature of the assets we target and our ability to finance such assets on a short or long-term basis. As part of our continuing efforts to provide value to our shareholders, we are currently considering a spin-off of our infrastructure business from the remainder of our asset portfolio. Our board has not formally evaluated any such transaction, and there can be no assurance as to the timing, terms, structure or completion of any such transaction. Any such transaction would be subject to a number of risks and uncertainties, could have tax implications for the holders of our common
shares, and could adversely affect the price of our common shares and our liquidity. Opportunities that present unattractive risk-return profiles relative to other available opportunities under particular market conditions may become relatively attractive under changed market conditions and changes in market conditions may therefore result in changes in the assets we target. Decisions to make acquisitions in new asset categories present risks that may be difficult for us to adequately assess and could therefore reduce or eliminate our ability to pay dividends on our commonordinary shares or have adverse effects on our liquidity or financial condition. A change in our asset acquisition strategy may also increase our exposure to interest rate, foreign currency or credit market fluctuations. In addition, a change in our asset acquisition strategy may increase our use of non-match-funded financing, increase the guarantee obligations we agree to incur or increase the number of transactions we enter into with affiliates. Our failure to accurately assess the risks inherent in new asset categories or the financing risks associated with such assets could adversely affect our results of operations and our financial condition.
Our Manager will not be liable to us for any acts or omissions performed in accordance with the Management Agreement, including with respect to the performance of our assets.
Pursuant to our Management Agreement, our Manager will not assume any responsibility other than to render the services called for thereunder in good faith and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Our Manager, its members, managers, officers, employees, sub-advisers and any other person controlling or Manager, will not be liable to us or any of our subsidiaries, to our board of directors, or our or any subsidiary’s shareholders or partners for any acts or omissions by our Manager, its members, managers, officers, employees, sub-advisers and any other person controlling or Manager, except liability to us, our shareholders, directors, officers and employees and persons controlling us, by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management Agreement. We will, to the full extent lawful, reimburse, indemnify and hold our Manager, its members, managers, officers and employees, sub-advisers and each other person, if any, controlling our Manager harmless of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including attorneys’ fees) in respect of or arising from any acts or omissions of an indemnified party made in good faith in the performance of our Manager’s duties under our Management Agreement and not constituting such indemnified party’s bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management Agreement.
Our Manager’s due diligence of potential asset acquisitions or other transactions may not identify all pertinent risks, which could materially affect our business, financial condition, liquidity and results of operations.
Our Manager intends to conduct due diligence with respect to each asset acquisition opportunity or other transaction it pursues. It is possible, however, that our Manager’s due diligence processes will not uncover all relevant facts, particularly with respect to any assets we acquire from third parties. In these cases, our Manager may be given limited access to information about the asset and will rely on information provided by the seller of the asset. In addition, if asset acquisition opportunities are scarce, the process for selecting bidders is competitive, or the timeframe in which we are required to complete diligence is short, our ability to conduct a due diligence investigation may be limited, and we would be required to make decisions based upon a less thorough diligence process than would otherwise be the case. Accordingly, transactions that initially appear to be viable may prove not to be over time, due to the limitations of the due diligence process or other factors.
Risks Related to Taxation
Shareholders
We expect the Company to be a passive foreign investment company (‘‘PFIC’’) and it could be a controlled foreign corporation (‘‘CFC’’) for U.S. federal income tax purposes, which may result in adverse tax considerations for U.S. shareholders.
We expect the Company to be treated as a PFIC and it could be treated as a CFC for U.S. federal income tax purposes. If you are a U.S. person and do not make a valid qualified electing fund (‘‘QEF’’) election with respect to us and each of our PFIC subsidiaries, then, unless we are a CFC and you own 10% or more of our shares (by vote or value), you would generally be subject to special deferred tax with respect to certain distributions on our shares, any gain realized on a disposition of our shares, and certain other events. The effect of this deferred tax could be materially adverse to you. Alternatively, if you are such a shareholder and make a valid QEF election for us and each of our PFIC subsidiaries, or if we are a CFC and you own 10% or more of our shares (by vote or value), you will generally not be subject to those taxes, but could recognize taxable income in a taxable year with respect to our shares in excess of any distributions that we make to you in that year, thus giving rise to so-called ‘‘phantom income’’ and to a potential out-of-pocket tax liability. No assurances can be given that any given shareholder will be able to make a valid QEF election with respect to us or our PFIC subsidiaries. See ‘‘U.S. Federal Income Tax Considerations—Considerations for U.S. Holders—PFIC Status and Related Tax Considerations.’’
Assuming we are a PFIC, distributions made by us to a U.S. person will generally not be eligible for taxation at reduced tax rates generally applicable to ‘‘qualified dividends’’ paid by certain U.S. corporations and ‘‘qualified foreign corporations’’ to individuals. The more favorable rates applicable to other corporate dividends could cause individuals to perceive investment in our shares to be relatively less attractive than investment in the shares of other corporations, which could adversely affect the value of our shares.
Investors should consult their tax advisors regarding the potential impact of these rules on their investment in us.
To the extent we recognize income treated as effectively connected with a trade or business in the United States, we would be subject to U.S. federal income taxation on a net income basis, which could adversely affect our business and result in decreased cash available for distribution to our shareholders.
If we are treated as engaged in a trade or business in the United States, the portion of our net income, if any, that is ‘‘effectively connected’’ with such trade or business would be subject to U.S. federal income taxation at maximum corporate rates, currently 21%. In addition, we may be subject to an additional U.S. federal branch profits tax on their shareour effectively connected earnings and profits at a rate of 30%. The imposition of such taxes could adversely affect our business and would result in decreased cash available for distribution to our shareholders. Although we (or one or more of our non-U.S. corporate subsidiaries) are expected to be treated as engaged in a U.S. trade or business, it is currently expected that only a small portion of our taxable income regardlesswill be treated as effectively connected with such U.S. trade or business. However, no assurance can be given that the amount of whether they receive any cash distributions from us.
So long as we wouldeffectively connected income will not be requiredgreater than currently expected, whether due to register as an investment company under the Investment Company Act of 1940a change in our operations or otherwise.
If there is not sufficient trading in our shares, or if we were a U.S. Corporation and 90%50% of our grossshares are held by certain 5% shareholders, we could lose our eligibility for an exemption from U.S. federal income taxation on rental income from our aircraft or ships used in ‘‘international traffic’’ and could be subject to U.S. federal income taxation which would adversely affect our business and result in decreased cash available for each taxable year constitutes “qualifying income” within the meaningdistribution to our shareholders.
We expect that we will be eligible for an exemption under Section 883 of the Internal Revenue Code of 1986, as amended (the “Code”‘‘Code’’), on a continuing basis, FTAI will be treated, forwhich provides an exemption from U.S. federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation. Holders of our common shares may be subject to U.S. federal, state, local and, in some cases, non-U.S. income taxation on their allocable share of our items of income, gain, loss, deduction and credit (including our allocable share of those items of Holdco or any other entity in which we invest that is treated as a partnership or is otherwise subject to tax on a flow through basis) for each of our taxable years ending with or within their taxable year, regardless of whether they receive cash distributions from us. Such shareholders may not receive cash distributions equal to their allocable share of our net taxable income or even the tax liability that results from that income.
We may hold or acquire certain investments through entities classified as CFCs or PFICs for U.S. federal income tax purposes.
Many of our investments are in non-U.S. corporations or are held through non-U.S. subsidiaries that are classified as corporations for U.S. federal income tax purposes. Some of these foreign entities may be classified as controlled foreign corporations (“CFCs”) or passive foreign investment companies (“PFICs”) (each as defined in the Code). Shareholders subject to U.S. federal income tax may experience adverse U.S. federal income tax consequences related to the indirect ownership of CFC or PFIC shares. For example, such shareholders may be required to take into account U.S. taxable income with respect to rental income derived from aircraft used in international traffic by certain foreign corporations. No assurances can be given that we will continue to be eligible for this exemption as changes in our ownership or the amount of our shares that are traded could cause us to cease to be eligible for such CFCs or PFICs withoutexemption. To qualify for this exemption in respect of rental income, the lessor of the aircraft must be organized in a corresponding receiptcountry that grants a comparable exemption to U.S. lessors. The Cayman Islands and the Marshall Islands grant such exemptions. Additionally, certain other requirements must be satisfied. We can satisfy these requirements in any year if, for more than half the days of cash from us. In addition, under the CFC rules, certain capital gainssuch year, our shares are treated as ordinary dividend incomeprimarily and regularly traded on a recognized exchange and certain shareholders, couldeach of whom owns 5% or more of our shares (applying certain attribution rules), do not collectively own more than 50% of our shares. Our shares will be subjectconsidered to income inclusionsbe primarily and regularly traded on a recognized exchange in respectany year if: (i) the number of trades in our shares effected on such recognized stock exchanges exceed the “subpart F income”number of our shares (or direct interests in our shares) that are traded during the year on all securities markets; (ii) trades in our shares are effected on such stock exchanges in more than de minimis quantities on at least 60 days during every calendar quarter in the year; and "global intangible low-taxed income" (“GILTI”)(iii) the aggregate number of our shares traded on such stock exchanges during the CFC. Treasury regulations, which are already effective with respect to GILTI and that will generally be effective beginning in 2023 with respect to subpart F income, generally have the effect of limiting certain adverse consequences of the CFC rules to shareholders treated for U.S. federal income tax purposes as
owning indirectly or constructively (including through other partnerships) stock possessing less thantaxable year is at least 10% of the voting power or value of such CFCs through their ownership in FTAI.
Under the PFIC rules, indirect ownership of PFIC shares by U.S. persons generally gives rise to materially adverse U.S. federal income tax consequences, which may be mitigated by electing to treat the PFIC as a qualified electing fund (“QEF”). We currently anticipate using commercially reasonable efforts to make such an election (a “QEF Election”) with respect to each PFIC in which we hold a material interest, directly or indirectly, in the first year during which we hold shares in such entity, provided such PFIC is not also a CFC. As a result, U.S. holders of our common shares will generally be subject to tax on a current basis on their respective shares of each such PFIC’s undistributed ordinary earnings and net capital gains for each year in which the entity is a PFIC, regardless of whether such holders receive a corresponding distribution of cash from us. In certain cases, however, we may be unable to make a QEF Election with respect to a PFIC because, for example, we are unable to obtain the necessary information. In such event, U.S. holders of our common shares will be subject to imputed interest charges and other disadvantageous tax treatment with respect to certain “excess distributions” from the PFIC and gain realized upon the direct or indirect sale of the PFIC (including through the sale our common shares). Treasury Regulations have been proposed that would require partners in a partnership – rather than the partnership itself – to make a QEF election with respect to stock of a PFIC held indirectly through a partnership, if a partner so chooses. A partner that makes such an election generally would be subject to tax on a current basis on its share of such PFIC’s undistributed ordinary earnings and net capital gains for each year in which the entity is a PFIC, regardless of whether such holders receive a corresponding distribution of cash from the PFIC or from us. In addition, under the proposed regulations, the PFIC rules would apply with respect to a partner’s indirect interest in a PFIC that is held through a partnership even if such entity is also a CFC with respect to the partnership. As a result, if finalized in substantially their current form, these regulations would generally result in the PFIC rules applying to FTAI investors with respect to foreign corporations that are majority- or wholly-owned by us.
Prospective investors should consult their tax advisors regarding the potential impact of the rules regarding CFCs and PFICs before investing in our shares.
Certain tax consequences of the ownership of our preferred shares, including treatment of distributions as guaranteed payments for the use of capital, are uncertain.
The tax treatment of distributions on our preferred shares is uncertain. We intend to treat the holders of our preferred shares as partners for tax purposes and we intend to treat distributions on the shares as guaranteed payments for the use of capital that will generally be taxable to the holders of our preferred shares as ordinary income. Although a holder of our preferred shares will recognize taxable income from the accrual of such a guaranteed payment (even in the absence of a contemporaneous cash distribution), we anticipate accruing and making the guaranteed payment distributions quarterly. Except in the case of any loss recognized in connection with our liquidation, we do not anticipate allocating any items of our income, gain, loss or deduction to holders of our preferred shares, nor do we anticipate allocating them any share of our nonrecourse liabilities. If our preferred shares were treated as indebtedness for tax purposes, rather than as guaranteed payments for the use of capital, distributions in respect of the preferred coupon likely would be treated as payments of interest by us to the holders of our preferred shares. Finally, if holders of our preferred shares were entitled to an allocation of income from FTAI, the risk factors applicable to holders of common shares would generally apply.
Shareholders that are not U.S. persons could be subject to U.S. federal income tax, including a 10% withholding tax, on the disposition of our shares.
If the Internal Revenue Service (the “IRS”) were to determine that we, Holdco, or any other entity in which we invest that is subject to tax on a flow-through basis, is engaged in a U.S. trade or business for U.S. federal income tax purposes, any gain recognized by a foreign transferor on the sale, exchange or other dispositionaverage number of our shares would generally be treated as “effectively connected” with such trade or business tooutstanding in that class during that year. If we were not eligible for the extent it does not exceed the effectively connected gain that would be allocable to the transferor if we sold all of our assets at their fair market value asexemption under Section 883 of the date of the transferor’s disposition. Under current law, any such gainCode, we expect that is treated as effectively connected willour U.S. source rental income would generally be subject to U.S. federal income tax. In addition, after December 31, 2022, certain brokers effecting transfers of our shares are required to deduct and withhold a tax equal to 10% of the amount realized by the transferor on the disposition, which would include an allocable portion of our liabilities and would therefore generally exceed the amount of transferred cash received by transferor in the disposition, unless the transferor provides an IRS Form W-9 or an affidavit stating the transferor’s taxpayer identification number and that the transferor is not a foreign person or certain exceptions apply. Additionally, we (or certain qualified intermediaries) may be required to deduct and withhold certain amounts with respect to distributions to the transferees of our shares. Although we do not believe that we are currently engaged in a U.S. trade or business (directly or indirectly through pass-through subsidiaries), we are not required to manage our operations in a manner that is intended to avoid the conduct of a U.S. trade or business.
Tax gain or losstaxation, on a sale or other disposition of our common shares could be more or less than expected.
If a sale of our common shares by a shareholder is taxable in the United States, the shareholder will generally recognize gain or loss equal to the difference between the amount realized by such shareholder in the sale and such shareholder’s adjusted tax basis in those shares. A shareholder’s adjusted tax basis in the shares at the time of sale will generally be lower than the shareholder’s original tax basis in the shares to the extent that prior distributions to such shareholder exceed the total taxable income allocated to such shareholder or in certain other instances. A shareholder may therefore recognize a gain in a sale of our common shares even if the shares are sold at a price that is less than their original cost. A portion of the amount realized, whether or not representing gain, may be treated as ordinary income to such shareholder.
Our ability to make distributions depends on our receiving sufficient cash distributions from our subsidiaries, and we cannot assure our shareholders that we will be able to make cash distributions to them in amounts that are sufficient to fund their tax liabilities.
Our subsidiaries may be subject to local taxes in each of the relevant territories and jurisdictions in which they operate, including taxes on income, profits or gains and withholding taxes. As a result, our funds available for distribution are indirectly reduced by such taxes, and the post-tax return to our shareholders is similarly reduced by such taxes.
In general, a shareholder that is subject to U.S. federal income tax must include in income its allocable share of FTAI’s items of income, gain, loss, deduction, and credit (including, so long as Holdco is treated as a partnership for U.S. federal income tax purposes, FTAI’s allocable share of those items of Holdco and any pass-through subsidiaries of Holdco) for each of our taxable years ending with or within such shareholder’s taxable year. However, the cash distributed by FTAI to a shareholder may not be sufficient to pay the full amount of such shareholder’s tax liability in respect of its investment in us.
If we are treated as a corporation for U.S. federal income tax purposes, the value of the shares could be adversely affected.
We have not requested, and do not plan to request, a ruling from the IRS on our treatment as a partnership for U.S. federal income tax purposes, or on any other matter affecting us. As of the date of the consummation of our initial public offering, under then current law and assuming full compliance with the terms of our operating agreement (and other relevant documents) and based upon factual statements and representations made by us, our outside counsel opined that we will be treated as a partnership, and not as an association or a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes. However, opinions of counsel are not binding upon the IRS or any court, and the IRS may challenge this conclusion and a court may sustain such a challenge. The factual representations made by us upon which our outside counsel relied relate to our organization, operation, assets, activities, income, and present and future conduct of our operations. In general, if an entity that would otherwise be classified as a partnership for U.S. federal income tax purposes is a “publicly traded partnership” (as defined in the Code) it will be nonetheless treated as a corporation for U.S. federal income tax purposes, unless the exception described below, and upon which we intend to rely, applies. A publicly traded partnership will, however, be treated as a partnership, and not as a corporation for U.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes “qualifying income” within the meaning of the Code and it is not required to register as an investment company under the Investment Company Act of 1940. We refer to this exception as the “Qualifying Income Exception.”
Qualifying income generally includes dividends, interest, capital gains from the sale or other disposition of stocks and securities and certain other forms of investment income. We believe that our return from investments will include interest, dividends, capital gains and other types of qualifying income, but no assurance can be given as to the types of income that will be earned in any given year.
If we fail to satisfy the Qualifying Income Exception, we would be required to pay U.S. federal income tax at regular corporate rates on our income, which could adversely affect our business, operating results and financial condition. In addition, we would likely be liable for state and local income and/or franchise taxes on our income. Finally, distributions of cash to shareholders would constitute qualified dividend income taxable to such shareholders to the extent of our earnings and profits and would not be deductible by us. Taxation of us as a publicly traded partnership taxable as a corporation could result in a material adverse effect on our cash flow and the after-tax returns for shareholders and thus could result in a substantial reduction in the value of our shares.
Shareholders that are not U.S. persons should also anticipate being required to file U.S. tax returns and may be required to pay U.S. tax solely on account of owning our shares.
We may be, or may become, engaged in a U.S. trade or business for U.S. federal income tax purposes (directly or indirectly through pass-through subsidiaries), in which case some portion of our income would be treated as effectively connected income with respect to non-U.S. persons. Moreover, we may, in the future, sell interests in U.S. real holding property corporations (each a “USRPHC”) and therefore be deemed to be engaged in a U.S. trade or business at such time. If we were to realize gain from the sale or other disposition of a U.S. real property interest (including a USRPHC) or were otherwise engaged in a U.S. trade or business, non-U.S. persons holding our common shares generally would be required to file U.S. federal income tax returns and would be subject to U.S. federal withholding tax on their allocable share of the effectively connected income or gain at the regular U.S. federal income tax rates. Likewise, non-U.S. persons holding our preferred shares, by virtue of receiving guaranteed payments, may be required to file U.S. federal income tax returns and may be subject to U.S. federal withholding tax on their guaranteed payments, irrespective of our operations or investments. In both cases, non-U.S. persons that are corporations may also be subject to a branch profits tax on their allocable share of such income. Non-U.S. persons should anticipate being required to file U.S. tax returns and may be required to pay U.S. tax solely on account of owning our shares. Non-U.S. shareholders are urged to consult their tax advisors regarding the tax consequences of an investment in our shares.
Non-U.S. persons that hold (or are deemed to hold) more than 5% of any class of our shares (or held, or were deemed to hold, more than 5% of any class of our shares) may be subject to U.S. federal income tax upon the disposition of some or all their shares.
If a non-U.S. person held more than 5% of any class of our shares at any time during the 5-year period preceding such non-U.S. person’s disposition of such shares, and we were considered a USRPHC (determined as if we were a U.S. corporation) at any time during such 5-year period because of our current or previous ownership of U.S. real property interests above a certain threshold, such non-U.S. person may be subject to U.S. tax on such disposition of such shares (and may have a U.S. tax return filing obligation).
Tax-exempt shareholders may face certain adverse U.S. tax consequences from owning our shares.
We are not required to manage our operations in a manner that would minimize the likelihood of generating income that would constitute “unrelated business taxable income” (“UBTI”) to the extent allocated to a tax-exempt shareholder. Although we expect to invest through subsidiaries that are treated as corporations for U.S. federal income tax purposes and such corporate investments would generally not result in an allocation of UBTI to a shareholder on account of the activities of those subsidiaries, we may not invest through corporate subsidiaries in all cases. Moreover, UBTI also includes income attributable to debt-financed property and we are not prohibited from incurring debt to finance our investments, including investments in subsidiaries. Furthermore, we are not prohibited from being (or causing a subsidiary to be) a guarantor of loans made to a subsidiary. If we (or certain of our subsidiaries) were treated as the borrower for U.S. tax purposes on account of those guarantees, some or all of our investments could be considered debt-financed property. In addition, the treatment of guaranteed payments for the use of capital to tax-exempt investors is not certain, and so distributions on our preferred shares may be treated as UBTI for federal income tax purposes, irrespective of our operations or the structure of our investments. The potential for income to be characterized as UBTI could make our shares an unsuitable investment for a tax-exempt entity. Tax-exempt shareholders are urged to consult their tax advisors regarding the tax consequences of an investment in our shares.
If substantially all of the U.S. source rental income derived from aircraft or ships used to transport passengers or cargo in international traffic (“U.S. source international transport rental income”) of any of our non-U.S. corporate subsidiaries is attributable to activities of personnel based in the United States, such subsidiary could be subject to U.S. federal income tax on a net income basis, at regular tax rates, rather than at a rate of 4% on gross income, which would adversely affect our business and result in decreased funds available for distribution to our shareholders.
We believe that the U.S. source international transport rental income of our non-U.S. subsidiaries generally will be subject to U.S. federal income tax, on a gross-income basis at a rate not in excess of 4%. as provided in Section 887 of the Code. If, anycontrary to expectations, we or certain of our non-U.S. subsidiaries that is treated as a corporation for U.S. federal income tax purposes did not comply with certain administrative guidelines of the IRS,U.S. Internal Revenue Service (the ‘‘IRS’’), such that 90% or more of such subsidiary’sthe U.S. source international transport rental income of the Company or any of such subsidiaries were attributable to the activities of personnel based in the United States, (in the case of bareboat leases) or from “regularly‘‘regularly scheduled transportation”transportation’’ as defined in such administrative guidelines (in the case of time-chartertime charter leases), our, or such subsidiary’s, U.S. source rental income would be treated as income effectively connected with the conduct of a trade or business in the United States. In such case, such subsidiary’s U.S. source international transport rental income would be subject to U.S. federal income taxtaxation at athe maximum corporate tax rate currently 21%.as well as state and local taxation. In addition, the Company or such subsidiary would be subject to the U.S. federal branch profits tax on its effectively connected earnings and profits at a rate of 30%. The imposition of such taxes could adversely affect our business and would result in decreased fundscash available for distribution to our shareholders.
The ability of
We or our corporate subsidiaries to utilize net operating losses (“NOLs”) to offset their future taxable income may become limited.
Certain of our corporate subsidiaries have significant NOLs, and any limitation on their use could materially affect our profitability. Such a limitation could occur if our corporate subsidiaries were to experience an “ownership change” as defined under Section 382 of the Code. The rules for determining ownership changes are complex, and changes in the ownership of our shares could cause an ownership change in one or more of our corporate subsidiaries. Sales of our shares by our shareholders, as well as future issuances of our shares, could contribute to a potential ownership change in our corporate subsidiaries.
Our subsidiaries may become subject to unanticipated tax liabilities that may have a material adverse effect on our results of operations.
Some of our subsidiaries are subject to income, withholding or other taxes in certain non-U.S. jurisdictions by reason of their jurisdiction of incorporation, activities and operations, where their assets are used or where the lessees of their assets (or others in possession of their assets) are located, and it is also possible that taxing authorities in any such jurisdictions could assert that we or our subsidiaries are subject to greater taxation than we currently anticipate. Further, the Multilateral ConventionOrganisation for Economic Co operation and Development (the ‘‘OECD’’) is conducting a project focused on base erosion and profit shifting in international structures, which seeks to Implement Tax Treaty Related Measuresestablish certain international standards for taxing the worldwide income of multinational companies. In addition, the OECD is working on a ‘‘BEPS 2.0’’ initiative, which is aimed at (i) shifting taxing rights to Prevent Base Erosionthe jurisdiction of the consumer and Profit Shifting (“BEPS”) recently entered into force(ii) ensuring all companies pay a global minimum tax. On October 8, 2021, the OECD announced an agreement among over 140 countries delineating an implementation plan, and on December 20, 2021, the jurisdictions that ratified it. TheOECD released model rules for the domestic implementation of BEPS prevention measures coulda 15% global minimum tax. As a result in a higher effective tax rate on our worldwide earnings by, for example, reducingof these developments, the tax deductionslaws of certain countries in which we and our affiliates do business could change on a prospective or otherwise increasing the taxable incomeretroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could harm our business, cash flows, results of our subsidiaries.operations and financial position. In addition, a portion of certain of our or our non-U.S. corporate subsidiaries’ income is treated as effectively connected with a U.S. trade or business and is accordingly subject to U.S. federal income tax or may be subject to gross-basis U.S. withholding tax. It is possible that the IRS could assert that a greater portion of our or any such non-U.S. subsidiaries’ income is effectively connected income that should be subject to U.S. federal income tax which could adversely affect our business and result in decreased funds available for distribution to our shareholders.
Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis.withholding tax.
The U.S. federal income tax treatment of our shareholders depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. The U.S. federal income tax treatment of our shareholders may also be modified by administrative, legislative or judicial interpretation at any time, possibly on a retroactive basis, and any such action may affect our investments and commitments that were previously made, and could adversely affect the value of our shares or cause us to change the way we conduct our business.
Our organizational documents and agreements permit the board of directors to modify our operating agreement from time to time, without the consent of shareholders, in order to address certain changes in Treasury regulations, legislation or interpretation. In some circumstances, such revisions could have a material adverse impact on some or all shareholders. Moreover, we will apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to shareholders in a manner that reflects such shareholders’ beneficial ownership of partnership items, taking into account variation in ownership interests during each taxable year because of trading activity. However, these assumptions and conventions may not be in compliance with all aspects of applicable tax requirements. It is possible that the IRS will assert successfully that the conventions and assumptions used by us do not satisfy the technical requirements of the Code and/or Treasury regulations and could require that items of income, gain, deduction, loss or credit, including interest deductions, be adjusted, reallocated, or disallowed, in a manner that adversely affects shareholders.
We could incur a significant tax liability if the IRS successfully asserts that the “anti-stapling” rules apply to our investments in our non-U.S. and U.S. subsidiaries, which would adversely affect our business and result in decreased funds available for distribution to our shareholders.
If we were subject to the “anti-stapling” rules of Section 269B of the Code, we would incur a significant tax liability as a result of owning more than 50% of the value of both U.S. and non-U.S. corporate subsidiaries, whose equity interests constitute “stapled interests” that may only be transferred together. If the “anti-stapling” rules applied, our non-U.S. corporate subsidiaries that are treated as corporations for U.S. federal income tax purposes would be treated as U.S. corporations, which would cause those entities to be subject to U.S. federal corporate income tax on their worldwide income. Because we intend to separately manage and operate our non-U.S. and U.S. corporate subsidiaries and structure their business activities in a manner that would allow us to dispose of such subsidiaries separately, we do not expect that the “anti-stapling” rules will apply. However, there can be no assurance that the IRS would not successfully assert a contrary position, which would adversely affect our business and result in decreased funds available for distribution to our shareholders.
Because we cannot match transferors and transferees of our shares, we have therefore adopted certain income tax accounting positions that may not conform with all aspects of applicable tax requirements. The IRS may challenge this treatment, which could adversely affect the value of our shares.
Because we cannot match transferors and transferees of our shares, we have adopted depreciation, amortization and other tax accounting positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our shareholders. It also could affect the timing of these tax benefits or the amount of gain on the sale of our common shares and could have a negative impact on the value of our common shares or result in audits of and adjustments to our shareholders’ tax returns.
We generally allocate items of income, gain, loss and deduction using a monthly or other convention, whereby any such items we recognize in a given month are allocated to our shareholders as of a specified date of such month. As a result, if a shareholder transfers its common shares, it might be allocated income, gain, loss and deduction realized by us after the date of the transfer. Similarly, if a shareholder acquires additional common shares, it might be allocated income, gain, loss, and deduction realized by us prior to its ownership of such common shares. Consequently, our shareholders may recognize income in excess of cash distributions received from us, and any income so included by a shareholder would increase the basis such shareholder has in its common shares and would offset any gain (or increase the amount of loss) realized by such shareholder on a subsequent disposition of its common shares.
Rules regarding U.S. federal income tax liability arising from IRS audits could adversely affect our shareholders.
For taxable years beginning on or after January 1, 2018, we will be liable for U.S. federal income tax liability arising from an IRS audit, unless certain alternative methods are available and we elect to use them. It is possible that certain shareholders or we may be liable for taxes attributable to adjustments to our taxable income with respect to tax years that closed before such shareholders owned our shares. Accordingly, these rules may adversely affect certain shareholders in certain cases. The manner in which these rules apply is uncertain and in many respects depends on the promulgation of future regulations or other guidance by the U.S. Treasury Department or the IRS. Investors should consult their own tax advisors regarding the potential U.S. federal, state, foreign, local and any other tax considerations of the ownership and disposition of our shares.
Risks Related to Our Shares
The market price and trading volume of our common and preferredordinary shares may be volatile, which could result in rapid and substantial losses for our shareholders.
The market price of our common and preferredordinary shares may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common and preferredordinary shares may fluctuate and cause significant price variations to occur. If the market price of our common or preferredordinary shares declines significantly, you may be unable to resell your shares at or above your purchase price, if at all. The market price of our common and preferredordinary shares may fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our shares include:
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a shift in our investor base;
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our quarterly or annual earnings, or those of other comparable companies;
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actual or anticipated fluctuations in our operating results;
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changes in accounting standards, policies, guidance, interpretations or principles;
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announcements by us or our competitors of significant investments, acquisitions or dispositions;
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the failure of securities analysts to cover our commonordinary shares;
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changes in earnings estimates by securities analysts or our ability to meet those estimates;
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the operating and share price performance of other comparable companies;
•prevailing interest rates or rates of return being paid by other comparable companies and the market for securities similar to our preferred shares;
•additional issuances of preferred shares;
•whether we declare distributions on our preferred shares;
•overall market fluctuations;
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general economic conditions; and
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developments in the markets and market sectors in which we participate.
Stock markets in the United States have experienced extreme price and volume fluctuations. Market fluctuations, as well as general political and economic conditions, such as acts of terrorism, prolonged economic uncertainty, a recession or interest rate or currency rate fluctuations, could adversely affect the market price of our common and preferredordinary shares.
An increase in market interest rates may have an adverse effect on the market price of our shares.
One of the factors that investors may consider in deciding whether to buy or sell our shares is our distribution rate as a percentage of our share price relative to market interest rates. If the market price of our shares is based primarily on the earnings and return that we derive from our investments and income with respect to our investments and our related distributions to shareholders, and not from the market value of the investments themselves, then interest rate fluctuations and capital market conditions will likely affect the market price of our shares. For instance, if market interest rates rise without an increase in our distribution rate, the market price of our shares could decrease, as potential investors may require a higher distribution yield on our shares or seek other securities paying higher distributions or interest. In addition, rising interest rates would result in increased interest expense on our outstanding and future (variable and fixed) rate debt, thereby adversely affecting cash flows and our ability to service our indebtedness and pay distributions.
We are required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of our internal controls, and the outcome of that effort may adversely affect our results of operations, financial condition and liquidity. Because we are no longer an emerging growth company, we are subject to heightened disclosure obligations, which may impact our share price.
As a public company, we are required to comply with Section 404 (“Section 404”) of the Sarbanes-Oxley Act. Section 404 requires that we evaluate the effectiveness of our internal control over financial reporting at the end of each fiscal year and to include a management report assessing the effectiveness of our internal controls over financial reporting in our Annual Report on Form 10-K for that fiscal year. Section 404 also requires an independent registered public accounting firm to attest to, and report on, management’s assessment of our internal controls over financial reporting. Because we ceased to be an emerging growth company at the end of 2017, we were required to have our independent registered public accounting firm attest to the effectiveness of our internal controls in our Annual Reports on Form 10-K starting with the fiscal year ended December 31, 2018, and will be required to do so going forward. The outcome of our review and the report of our independent registered public accounting firm may adversely affect our results of operations, financial condition and liquidity. During the course of our review, we may identify control deficiencies of varying degrees of severity, and we may incur significant costs to remediate those deficiencies or otherwise improve our internal controls. As a public company, we are required to report control deficiencies that constitute a “material weakness” in our internal control over financial reporting. If we discover a material weakness in our internal control over financial reporting, our share price could decline and our ability to raise capital could be impaired.
Your percentage ownership in us may be diluted in the future.
Your percentage ownership in FTAIus may be diluted in the future because of equity awards granted and may be granted to our Manager pursuant to the Management Agreement and the Nonqualified Shares Option and Incentive Plan.Award Plan (“Incentive Plan”). Since 2015, we granted our Manager an option to acquire 3,903,010 commonordinary shares in connection with equity offerings. In the future, upon the successful completion of additional offerings of our commonordinary shares or other equity securities (including securities issued as consideration in an acquisition), we will grant to our Manager options to purchase commonordinary shares in an amount equal to 10% of the number of commonordinary shares being sold in such offerings (or if the issuance relates to equity securities other than our commonordinary shares, options to purchase a number of commonordinary shares equal to 10% of the gross capital raised in the equity issuance divided by the fair market value of a commonan ordinary share as of the date of the issuance), with an exercise price equal to the offering price per share paid by the public or other ultimate purchaser or attributed to such securities in connection with an acquisition (or the fair market value of a commonan ordinary share as of the date of the equity issuance if it relates to equity securities other than our commonordinary shares), and any such offering or the exercise of the option in connection with such offering would cause dilution.
Our board of directors has adopted the Incentive Plan, which provides for the grant of equity-based awards, including restricted shares, stock options, stock appreciation rights, performance awards, restricted share units, tandem awards and other equity-based and non-equity based awards, in each case to our Manager, to the directors, officers, employees, service providers, consultants and advisors of our Manager who perform services for us, and to our directors, officers, employees, service providers, consultants and advisors. We have initially reserved 30,000,000 commonordinary shares for issuance under the Incentive Plan. As of JuneSeptember 30, 2022, rights relating to 3,737,742 of our commonordinary shares were outstanding under the Incentive Plan. In the future on the date of any equity issuance by us during the remaining portion of the ten-year term of the Incentive Plan (including in respect of securities issued as consideration in an acquisition), the maximum number of shares available for issuance under the Incentive Plan will be increased to include an additional number of commonordinary shares equal to ten percent (10%) of either (i) the total number of commonordinary shares newly issued by us in such equity issuance or (ii) if such equity issuance relates to equity securities other than our commonordinary shares, a number of our commonordinary shares equal to 10% of (A) the gross capital raised in an equity issuance of equity securities other than commonordinary shares during the remaining portion of the ten-year term of the Incentive Plan, divided by (B) the fair market value of a commonan ordinary share as of the date of such equity issuance.
Sales or issuances of our commonordinary shares could adversely affect the market price of our commonordinary shares.
Sales of substantial amounts of our commonordinary shares in the public market, or the perception that such sales might occur, could adversely affect the market price of our commonordinary shares. The issuance of our commonordinary shares in connection with property, portfolio or business acquisitions or the exercise of outstanding options or otherwise could also have an adverse effect on the market price of our commonordinary shares.
The incurrence or issuance of debt, which ranks senior to our commonordinary shares upon our liquidation, and future issuances of equity or equity-related securities, which would dilute the holdings of our existing commonordinary shareholders and may be senior to our commonordinary shares for the purposes of making distributions, periodically or upon liquidation, may negatively affect the market price of our commonordinary shares.
We have incurred and may in the future incur or issue debt or issue equity or equity-related securities to finance our operations, acquisitions or investments. Upon our liquidation, lenders and holders of our debt and holders of our preferred shares (if any) would receive a distribution of our available assets before commonordinary shareholders. Any future incurrence or issuance of debt would increase our interest cost and could adversely affect our results of operations and cash flows. We are not required to offer any additional equity securities to existing commonordinary shareholders on a preemptive basis. Therefore, additional issuances of commonordinary shares, directly or through convertible or exchangeable securities (including limited partnership interests in our operating partnership), warrants or options, will dilute the holdings of our existing commonordinary shareholders and such issuances, or the perception of such issuances, may reduce the market price of our commonordinary shares. Any preferred shares issued by us would likely have a preference on distribution payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make distributions to commonordinary shareholders. Because our decision to incur or issue debt or issue equity or equity-related securities in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. Thus, commonordinary shareholders bear the risk that our future incurrence or issuance of debt or issuance of equity or equity-related securities will adversely affect the market price of our commonordinary shares.
Our determination of how much leverage to use to finance our acquisitions may adversely affect our return on our assets and may reduce funds available for distribution.
We utilize leverage to finance many of our asset acquisitions, which entitles certain lenders to cash flows prior to retaining a return on our assets. While our Manager targets using only what we believe to be reasonable leverage, our strategy does not limit the amount of leverage we may incur with respect to any specific asset. The return we are able to earn on our assets and funds available for distribution to our shareholders may be significantly reduced due to changes in market conditions, which may cause the cost of our financing to increase relative to the income that can be derived from our assets.
While we currently intend to pay regular quarterly dividends to our shareholders, we may change our dividend policy at any time.
Although we currently intend to pay regular quarterly dividends to holders of our commonordinary shares, we may change our dividend policy at any time. Our net cash provided by operating activities has been less than the amount of distributions to our shareholders. The declaration and payment of dividends to holders of our commonordinary shares will beare at the discretion of our board of directors in accordance with applicable law after taking into account various factors, including actual results of operations,
liquidity and financial condition, net cash provided by operating activities, restrictions imposed by applicable law, our taxable income, our operating expenses and other factors our board of directors deem relevant. Our long term goal is to maintain a payout ratio of between 50-60% of funds available for distribution, with remaining amounts used primarily to fund our future acquisitions and opportunities. There can be no assurance that we will continue to pay dividends in amounts or on a basis consistent with prior distributions to our investors, if at all. Because we are a holding company and have no direct operations, we will only be able to pay dividends from our available cash on hand and any funds we receive from our subsidiaries and our ability to receive distributions from our subsidiaries may be limited by the financing agreements to which they are subject. In addition, our existing indebtedness does, and our future indebtedness may, limit our ability to pay dividends on our common and preferred shares.ordinary. Moreover, pursuant to the PartnershipServices and Profit Sharing Agreement, the General Partner will beMaster GP is entitled to receive incentive allocationspayments before any amounts are distributed by us based both on our consolidated net income and capital gains income in each fiscal quarter and for each fiscal year, respectively. Furthermore, the terms of our Series A preferred shares generally prevent us from declaring or paying dividends on or repurchasing our common shares or other junior capital unless all accrued distributions on such preferred shares have been paid in full.
Anti-takeover provisions in our operating agreement and Delaware lawArticles could delay or prevent a change in control.
Provisions in our operating agreementArticles may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our shareholders. For example, our operating agreementArticles provides for a staggered board, requires advance notice for proposals by shareholders and nominations, places limitations on convening shareholder meetings, and authorizes the issuance of preferred shares that could be issued by our board of directors to thwart a takeover attempt. In addition, certain provisions of Delaware law may delay or prevent a transaction that could cause a change in our control. The market price of our shares could be adversely affected to the extent that provisions of our operating agreement discourage potential takeover attempts that our shareholders may favor.
There are certain provisions in our operating agreement regarding exculpation and indemnification of our officers and directors that differ from the Delaware General Corporation Law (the “DGCL”) in a manner that may be less protective of the interests of our shareholders.
Our operating agreement provides that to the fullest extent permitted by applicable law our directors or officers will not be liable to us. Under the DGCL, a director or officer would be liable to us for (i) breach of duty of loyalty to us or our shareholders, (ii) intentional misconduct or knowing violations of the law that are not done in good faith, (iii) improper redemption of shares or declaration of dividend, or (iv) a transaction from which the director derived an improper personal benefit. In addition, our operating agreement provides that we indemnify our directors and officers for acts or omissions to the fullest extent provided by law. Under the DGCL, a corporation can only indemnify directors and officers for acts or omissions if the director or officer acted in good faith, in a manner he reasonably believed to be in the best interests of the corporation, and, in criminal action, if the officer or director had no reasonable cause to believe his conduct was unlawful. Accordingly, our operating agreement may be less protective of the interests of our shareholders, when compared to the DGCL, insofar as it relates to the exculpation and indemnification of our officers and directors.
If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our commonordinary shares, our share price and trading volume could decline.
The trading market for our commonordinary shares are influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us downgrades our commonordinary units or publishes inaccurate or unfavorable research about our business, our commonordinary share price may decline. If analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our commonordinary share price or trading volume to decline and our commonordinary shares to be less liquid.
Item 2. Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. Item 3. | Defaults Upon Senior Securities |
None.
Item 4. Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5.
None.
Item 6. Exhibits | Exhibit No. | | | | | | | | | | Description |
| Exhibit No. | | Description |
| | | Agreement and Plan of Merger, dated as of November 19, 2019,August 12, 2022, by and among, Soo Line Corporation, Black Bear AcquisitionFTAI, the Company and FTAI Aviation Merger Sub LLC Railroad Acquisition Holdings LLC(incorporated by reference to Annex A to FTAI’s Registration Statement on Form S-4, filed on October 11, 2022). |
| | | Separation and Distribution Agreement, dated as of August 1, 2022, between FTAI Infrastructure Inc. and Fortress Worldwide Transportation and Infrastructure General PartnershipInvestors LLC (incorporated by reference to Exhibit 2.1 of the Company’sFTAI’s Current Report on Form 8-K, filed January 6, 2020)on August 1, 2022). |
| | | Certificate of Formation (incorporated by reference to Exhibit 3.1 of Amendment No. 4 to the Company's Registration Statement on Form S-1, filed on April 30, 2015). |
| | | Fourth Amended and Restated Limited LiabilityMemorandum and Articles of Association of the Company Agreement of Fortress Transportation and Infrastructure Investors LLC, dated as of March 25, 2021 (incorporated by reference to Exhibit 3.2 to Fortress Transportation and Infrastructure Investors LLC’s Form 8-A, filed March 25, 2021). |
| | | Share Designation with respect to the 8.25% Fixed-to-Floating Series A Cumulative Perpetual Redeemable Preferred Shares, dated as of September 12, 2019 (included as part of Exhibit 3.2). |
| | | Share Designation with respect to the 8.00% Fixed-to-Floating Series B Cumulative Perpetual Redeemable Preferred Shares, dated as of November 27, 2019 (included as part of Exhibit 3.2). |
| | | Share Designation with respect to the 8.25% Fixed-Rate Reset Series C Cumulative Perpetual Redeemable Preferred Shares, dated as of March 25, 2021 (included as part of Exhibit 3.2). |
| | | Form of Certificate of Designations (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed July 1,on November 14, 2022). |
| | | Indenture,Services and Profit Sharing Agreement, dated September 18, 2018, betweenNovember 10, 2022, by and among FTAI Aviation Holdco Ltd., Fortress Transportation and Infrastructure Investors LLC and U.S. Bank National Association, as trustee, relating to the Company’s 6.50% senior unsecured notes due 2025 (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K, filed on September 18, 2018). |
| | | Form of global note representing the Company’s 6.50% senior unsecured notes due 2025 (included in Exhibit 4.8). |
| | | First Supplemental Indenture, dated May 21, 2019, between Fortress Transportation and Infrastructure Investors LLC and U.S. Bank National Association, as trustee, relating to the Company’s 6.50% senior unsecured notes due 2025 (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K, filed on May 21, 2019). |
| | | Second Supplemental Indenture, dated December 23, 2020, between Fortress Transportation and Infrastructure Investors LLC and U.S. Bank National Association, as trustee, relating to the Company’s 6.50% senior unsecured notes due 2025 (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K, filed on December 23, 2020). |
| | | Indenture, dated April 12, 2021, between Fortress Transportation and Infrastructure Investors LLC and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to Fortress Transportation and Infrastructure Investors LLC’s Form 8-K, filed April 12, 2021). |
| | | Form of global note representing the Company’s 5.50% senior unsecured notes due 2028 (included in Exhibit 4.12). |
| | | First Supplemental Indenture, dated as of September 24, 2021, between Fortress Transportation and Infrastructure Investors LLC and U.S. Bank National Association, as trustee, relating to the Company’s 5.50% senior unsecured notes due 2028 (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K, filed on September 24, 2021). |
| | | Form of certificate representing the 8.25% Fixed-to-Floating Rate Series A Cumulative Perpetual Redeemable Preferred Shares of Fortress Transportation and Infrastructure Investors LLC (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-A, filed September 12, 2019). |
| | | Form of certificate representing the 8.00% Fixed-to-Floating Rate Series B Cumulative Perpetual Redeemable Preferred Shares of Fortress Transportation and Infrastructure Investors LLC (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A, filed November 27, 2019). |
| | | Form of certificate representing the 8.25% Fixed-Rate Reset Series C Cumulative Perpetual Redeemable Preferred Shares of Fortress Transportation and Infrastructure Investors LLC (incorporated by reference to Exhibit 4.1 to Fortress Transportation and Infrastructure Investors LLC’s Form 8-A, filed March 25, 2021). |
| | | Description of Securities Registered under Section 12 of the Exchange Act (incorporated by reference to Exhibit 4.18 to Fortress Transportation and Infrastructure Investors LLC’s Form 10-K, filed February 25, 2022). |
| | | Fourth Amended and Restated Partnership Agreement of Fortress Worldwide Transportation and Infrastructure General Partnership (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K, filed on May 21, 2015). |
† | | | Management and Advisory Agreement, dated as of May 20, 2015, between Fortress Transportation and Infrastructure Investors LLC and FIG LLC (incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K, filed on May 21, 2015). |
† | | | Registration Rights Agreement, dated as of May 20, 2015, among Fortress Transportation and Infrastructure Investors LLC, FIG LLC and Fortress Transportation and Infrastructure Master GP LLC (incorporated by reference to Exhibit 10.3 of the Company's Current Report on Form 8-K, filed on May 21, 2015). |
† | | | Fortress Transportation and Infrastructure Investors LLC Nonqualified Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.4 of the Company's Current Report on Form 8-K, filed on May 21, 2015). |
| | | Form of director and officer indemnification agreement of Fortress Transportation and Infrastructure Investors LLC (incorporated by reference to Exhibit 10.5 of Amendment No. 4 to the Company's Registration Statement on Form S-1, filed April 30, 2015). |
* | | | Engineering, Procuring and Construction Agreement dated as of February 15, 2019, between Long Ridge Energy Generation LLC and Kiewit Power Constructors Co. (incorporated by reference to Exhibit 10.17 of the Company’s Quarterly Report on Form 10-Q, filed on May 3, 2019). |
* | | | Purchase and Sale of Power Generation Equipment and Related Services Agreement dated as of February 15, 2019, between Long Ridge Energy Generation LLC and General Electric Company (incorporated by reference to Exhibit 10.18 of the Company’s Quarterly Report on Form 10-Q, filed on May 3, 2019). |
| | | | | | | | | | | |
| Exhibit No. | | Description |
| | | First Lien Credit Agreement dated as of February 15, 2019, among Ohio River PP Holdco LLC, Ohio Gasco LLC, Long Ridge Energy Generation LLC, the lenders and issuing banks from time to time party thereto, and Cortland Capital Market Services LLC, as administrative agent (incorporated by reference to Exhibit 10.19 of the Company’s Quarterly Report on Form 10-Q, filed on May 3, 2019). |
| | | Second Lien Credit Agreement dated as of February 15, 2019, among Ohio River PP Holdco LLC, Ohio Gasco LLC, Long Ridge Energy Generation LLC, the lenders from time to time party thereto, and Cortland Capital Market Services LLC, as administrative agent (incorporated by reference to Exhibit 10.20 of the Company’s Quarterly Report on Form 10-Q, filed on May 3, 2019). |
† | | | Form of Award Agreement under the Fortress Transportation and Infrastructure Investors Nonqualified Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on January 17, 2018). |
| | | Credit Agreement, dated as of February 11, 2020, among Jefferson 2020 Bond Borrower LLC, as the borrower and Fortress Transportation and Infrastructure Investors LLC, acting through one or more affiliates, as the lender (incorporated by reference to Exhibit 10.15 of the Company’s Quarterly Report on Form 10-Q, filed on May 1, 2020). |
| | | Senior Loan Agreement, dated as of February 1, 2020, between Port of Beaumont Navigation District of Jefferson County, Texas, as issuer and Jefferson 2020 Bond Borrower LLC, as borrower (incorporated by reference to Exhibit 10.16 of the Company’s Quarterly Report on Form 10-Q, filed on May 1, 2020). |
| | | Deed of Trust, Security Agreement, Financing Statement and Fixture Filing, dated February 1, 2020, from Jefferson 2020 Bond Borrower LLC, as grantor, and Jefferson 2020 Bond Lessee LLC, as grantor, to Ken N. Whitlow, as Deed of Trust Trustee for the benefit of Deutsche Bank National Trust Company, as beneficiary (incorporated by reference to Exhibit 10.17 of the Company’s Quarterly Report on Form 10-Q, filed on May 1, 2020). |
| | | Amended and Restated Lease and Development Agreement, effective as of January 1, 2020, by and between Port of Beaumont Navigation District of Jefferson County, Texas, as lessor, and Jefferson 2020 Bond Lessee LLC, as lessee (incorporated by reference to Exhibit 10.18 of the Company’s Quarterly Report on Form 10-Q, filed on May 1, 2020). |
| | | Membership Interest Purchase Agreement, dated June 7, 2021, by and between United States Steel Corporation and Percy Acquisition LLC (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on June 8, 2021)November 14, 2022). |
† | | | Credit Agreement, dated July 28, 2021, among Fortress TransportationManagement and Infrastructure Investors LLC, the guarantors from time to time party thereto, the lenders from time to time party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent (incorporated by reference to Exhibit 10.21 of the Company’s Quarterly Report on Form 10-Q, filed on July 29, 2021). |
| | | Railway Services Agreement, dated July 28, 2021, by and among United States Steel Corporation, Transtar, LLC, Delray Connecting Railroad Company, Fairfield Southern Company, Inc., Gary Railway Company, Lake Terminal Railroad Company, Texas & Northern Railroad Company and Union Railroad Company, LLC (incorporated by reference to Exhibit 10.22 of the Company’s Quarterly Report on Form 10-Q, filed on July 29, 2021). |
| | | Amended and Restated CreditAdvisory Agreement, dated as of December 2, 2021,July 31, 2022, between Fortress Transportation and Infrastructure Investors LLC,FTAI, FTAI Aviation Ltd., the lenders and issuing banks from time to timeSubsidiaries of FTAI party thereto and JPMorgan Chase Bank, N.A., as administrative agentFIG LLC (incorporated by reference to Exhibit 10.1 of the Company’sFTAI’s Current Report on Form 8-K, filed December 8, 2021)on August 1, 2022). |
† | | | CreditAmended and Restated Registration Rights Agreement, dated as of December 2, 2021, betweenNovember 10, 2022, by and among FTAI Aviation Ltd., Fortress Transportation and Infrastructure Investors LLC, the guarantors from time to time party thereto, the lenders from time to time party theretoFortress Worldwide Transportation and Morgan Stanley Senior Funding, Inc., as administrative agentInfrastructure Master GP LLC and FIG LLC (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed December 8, 2021)on November 14, 2022). |
**† | | | FTAI Aviation Ltd. Nonqualified Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-4, filed on October 4, 2022). |
| | | Form of SubscriptionFTAI Aviation Ltd. Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 of10.6 to the Company’s Current ReportRegistration Statement on Form 8-K,S-4, filed July 1,on October 4, 2022). |
† | | | Form of Investors’ RightsDirector Award Agreement pursuant to the FTAI Aviation Ltd. Nonqualified Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.2 of10.7 to the Company’s Current ReportRegistration Statement on Form 8-K,S-4, filed July 1,on October 4, 2022). |
† | | | Form of WarrantAward Agreement under the FTAI Aviation Ltd. Nonqualified Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.3 of10.8 to the Company’s Current ReportRegistration Statement on Form 8-K,S-4, filed July 1,on October 4, 2022). |
| | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
| | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
| | | 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.
|
| | | 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.
|
| 101
| | | The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended JuneSeptember 30, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Changes in Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.
|
| 104
| | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
|
† | Management contracts and compensatory plans or arrangements. |
* | Portions of this exhibit have been omitted. |
** | Certain schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. |
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:
FORTRESS TRANSPORTATION AND INFRASTRUCTURE INVESTORS LLC
FTAI Aviation Ltd.
By: | | | | | | | | | | | | | | |
By: | /s/ Joseph P. Adams, Jr. | | Date: | July 28,November 17, 2022 |
| Joseph P. Adams, Jr. | | | |
| Chairman and Chief Executive Officer | | | |
By: | /s/ Eun (Angela) Nam | | Date: | | | | | | | | | | | November 17, 2022 |
By: | /s/ Scott ChristopherEun (Angela) Nam | | Date: | July 28, 2022 |
| Scott Christopher | | | |
| Chief Financial Officer | | | |
| | | | | | | | | | | | | | |
By: | /s/ Eun Nam | | Date: | July 28, 2022 |
| Eun Nam | | | |
| Chief Accounting Officer | | | |