Willis Lease Finance Corporation
03/11/2025 | Press release | Distributed by Public on 03/11/2025 12:46
Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report.
A discussion of our results of operations for our fiscal year ended December 31, 2023 compared to the year ended December 31, 2022 is included our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 15, 2024 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations."
OVERVIEW
Forward-Looking Statements.This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding prospects or future results of operations or financial position, made in this Annual Report on Form 10-K are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including, among others: the effects on the airline industry and the global economy of events such as the current high interest rate and inflationary environment; changes in oil prices and other disruptions to the world markets; trends in the airline industry and our ability to capitalize on those trends, including growth rates of markets and other economic factors; risks associated with owning and leasing jet engines and aircraft; our ability to successfully negotiate equipment purchases, sales and leases, to collect outstanding amounts due and to control costs and expenses; managing the risks and impacts of potential and actual security breaches, cyberattacks, privacy breaches or data breaches, including business, service, or operational disruptions, the unauthorized access to or disclosure of data, financial loss, reputational damage, increased response and remediation costs, legal and regulatory proceedings or other unfavorable outcomes; changes in interest rates and availability of capital, both to us and our customers; our ability to continue to meet the changing customer demands; regulatory changes affecting airline operations, aircraft maintenance, accounting standards and taxes; the market value of engines and other assets in our portfolio; and the impact of pandemics or other public health crises on our business, financial condition, and results of operations. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management's expectations, are described in greater detail in Item 1A "Risk Factors" of Part I which, along with the other discussion in this report, describes some, but not all, of the factors that could cause actual results to differ significantly from management's expectations.
General. Our core business is acquiring and leasing commercial aircraft and aircraft engines and related aircraft equipment pursuant to operating leases, all of which we sometimes collectively refer to as "equipment." As of December 31, 2024, the majority of our leases were operating leases with the exception of certain failed sale-leaseback transactions classified as notes receivable under the guidance provided by ASC 842 and investments in sales-type leases. As of December 31, 2024, we had 70 lessees in 37 countries. Our portfolio is continually changing due to acquisitions and sales. As of December 31, 2024, we had $2,635.9 million of equipment held in our operating lease portfolio, $183.6 million of notes receivable, $31.1 million of maintenance rights, and $21.6 million of investments in sales-type leases, which represented, in aggregate, 354 engines, 16 aircraft, one marine vessel and other leased parts and equipment. As of December 31, 2024, we also managed 277 engines, aircraft and related equipment on behalf of other parties.
Willis Aero is a wholly-owned and vertically-integrated subsidiary whose primary focus is the sale of aircraft engine parts and materials through the acquisition or consignment of aircraft engines. As of December 31, 2024, we had $72.2 million in spare parts inventory. Willis Asset Management is a wholly-owned and vertically-integrated subsidiary whose primary focus is the engine management and consulting business.
In 2011 we entered into an agreement with Mitsui & Co., Ltd. to participate in a joint venture formed as a Dublin-based Irish limited company, WMES, for the purpose of acquiring and leasing jet engines. Each partner holds a 50% interest in the joint venture. WMES owned a lease portfolio of 50 engines with a net book value of $328.9 million at December 31, 2024. Our investment in the joint venture was $44.8 million as of December 31, 2024.
In 2014 we entered into an agreement with CASC to participate in CASC Willis, a joint venture based in Shanghai, China. Each partner holds a 50% interest in the joint venture. CASC Willis acquires and leases jet engines to Chinese airlines and concentrates on meeting the fast-growing demand for leased commercial aircraft engines and aviation assets in the People's Republic of China. CASC Willis owned a lease portfolio of four engines with a net book value of $37.3 million as of December 31, 2024. Our investment in the joint venture was $17.9 million as of December 31, 2024.
We actively manage our portfolio and structure our leases to maximize the residual values of our leased assets. Our leasing business focuses on popular Stage IV commercial jet engines manufactured by CFMI, General Electric, Pratt & Whitney, Rolls Royce, and International Aero Engines. These engines are the most widely used engines in the world, powering Airbus, Boeing, Bombardier, and Embraer aircraft.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to residual values, estimated asset lives, impairments, bad debts, and credit losses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies, grouped by our activities, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Leasing Related Activities. Revenue from leasing of aircraft equipment is recognized as operating lease revenue on a straight-line basis over the terms of the applicable lease agreements. Where collection cannot be reasonably assured, for example, upon a lessee bankruptcy, we do not recognize revenue until cash is received. We also estimate and charge to income a provision for bad debts based on our experience in the business and with each specific customer and the level of past due accounts. The financial condition of our customers may deteriorate and result in actual losses exceeding the estimated allowances. In addition, any deterioration in the financial condition of our customers may adversely affect future lease revenues. As of December 31, 2024, the majority of our leases were operating leases with the exception of certain failed sale-leaseback transactions classified as notes receivable under the guidance provided by ASC 842 and investments in sales-type leases. Under these leases, we retain title to the leased equipment, thereby retaining the potential benefit and assuming the risk of the residual value of the leased equipment.
We generally depreciate engines on a straight-line basis over 15 years to a 55% residual value. Aircraft and airframes are generally depreciated on a straight-line basis over 13 to 20 years to a 17% residual value. The marine vessel is depreciated on a straight-line basis over an estimated useful life of 18 years to a 15% residual value. Other leased parts and equipment are generally depreciated on a straight-line basis over 14 to 15 years to a 25% residual value. When we pay for major overhauls, which improve functionality or extend the original useful life, they are capitalized and depreciated over the shorter of the estimated period to the next overhaul ("deferral method") or the remaining useful life of the equipment. We do not accrue for planned major maintenance. For equipment which is unlikely to be repaired at the end of its current expected life, and is likely to be disassembled upon lease termination, we depreciate the equipment over its estimated life to a residual value based on an estimate of the wholesale value of the parts after disassembly. As of December 31, 2024, 14 engines having a net book value of $11.6 million were depreciated under this policy with estimated remaining useful lives up to 34 months.
Asset Valuation. Long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, and long-lived assets and certain identifiable intangibles to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. When a long-lived asset is written down and moved to equipment held for sale from equipment held for lease, it is no longer depreciated.
On a quarterly basis, management monitors the lease portfolio for events which may indicate that a particular asset may need to be evaluated for potential impairment. These events may include a decision to part-out or sell an asset, knowledge of specific damage to an asset, or supply/demand events which may impact the Company's ability to lease an asset in the future. On an annual basis, even absent any such 'triggering event', we evaluate the carrying value of the assets in our lease portfolio to determine if any impairment exists.
Impairment may be identified by several factors, including, comparison of estimated sales proceeds or forecasted undiscounted cash flows over the life of the asset with the asset's book value. If the forecasted undiscounted cash flows are less than the book value, the asset is written down to its fair value. When evaluating for impairment, we test at the individual asset level (e.g., engine or aircraft), as each asset generates its own stream of cash flows, including lease rents, maintenance reserves and repair costs.
We must make assumptions which underlie the most significant and subjective estimates in determining whether any impairment exists. Those estimates, and the underlying assumptions, are as follows:
•Fair value - we determine fair value by reference to independent appraisals, quoted market prices (e.g., an offer to purchase) and other factors, including but not limited to current data from airlines, engine manufacturers and MRO providers, as well as specific market sales and repair cost data.
•Future cash flows - when evaluating the future cash flows that an asset will generate, we make assumptions regarding the lease market for specific engine models, including estimates of market lease rates and future demand. These assumptions are based upon lease rates that we are obtaining in the current market as well as our expectation of future demand for the specific engine/aircraft model.
If the forecasted undiscounted cash flows and fair value of our long-lived assets decrease in the future, we may incur impairment charges. Write-downs of equipment to their estimated fair values totaled $11.2 million for the year ended December 31, 2024, primarily reflecting an adjustment of the carrying value of one airframe and 11 engines. As of December 31, 2024, included within equipment held for lease and equipment held for sale was $50.8 million in remaining book value of 16 assets which were previously written down.
Write-downs of equipment to their estimated fair values totaled $4.4 million for the year ended December 31, 2023, primarily reflecting an adjustment of the carrying value of five engines and two airframes. As of December 31, 2023, included within equipment held for lease and equipment held for sale was $31.9 million in remaining book value of 15 assets which were previously written down.
Management continuously monitors the aviation industry and evaluates any trends, events and uncertainties involving airlines, individual aircraft and engine models, as well as the engine leasing and sale market which would materially affect the methodology or assumptions employed by WLFC. We do not consider there to be any trends, events or uncertainties that currently exist or that are reasonably likely to occur that would materially affect our methodology or assumptions. However, should any arise, we will adjust our methodology and our disclosure accordingly.
Spare parts inventory is stated at the lower of cost or net realizable value. An impairment charge for excess or inactive inventory is recorded based upon an analysis that considers current inventory levels, historical usage patterns, future sales expectations, and salvage value.
RECENT ACCOUNTING PRONOUNCEMENTS
The most recent adopted and to be adopted accounting pronouncements are described in Note 1(x) to our Consolidated financial statements included in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023
Revenue is summarized as follows:
| Years Ended December 31, | |||||||||||||||||
| 2024 | 2023 | % Change | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Lease rent revenue | $ | 238,236 | $ | 213,138 | 11.8 | % | |||||||||||
| Maintenance reserve revenue | 213,908 | 133,668 | 60.0 | % | |||||||||||||
| Spare parts and equipment sales | 27,099 | 20,359 | 33.1 | % | |||||||||||||
| Interest revenue | 11,683 | 8,721 | 34.0 | % | |||||||||||||
| Gain on sale of leased equipment | 45,063 | 10,581 | 325.9 | % | |||||||||||||
| Maintenance services revenue | 24,158 | 24,168 | - | % | |||||||||||||
| Other revenue | 9,076 | 7,920 | 14.6 | % | |||||||||||||
| Total revenue | $ | 569,223 | $ | 418,555 | 36.0 | % | |||||||||||
Lease Rent Revenue. Lease rent revenue consists of rental income from long-term and short-term engine leases, aircraft leases, and other leased parts and equipment. Lease rent revenue increased by $25.1 million, or 11.8%, to $238.2 million for the year ended December 31, 2024 from $213.1 million for the year ended December 31, 2023. The increase is primarily due to an increase in the average size of the portfolio as compared to that of the prior period, offset by a slight decrease in average utilization (based on net book value) of equipment held in our operating lease portfolio, primarily as a result of the Company's significant purchases of engines during December 2024, the majority of which were off-lease as of December 31, 2024.
Two customers accounted for approximately 11% each of total lease rent revenue during the year ended December 31, 2024. One customer accounted for approximately 15% of total lease rent revenue during the year ended December 31, 2023.
As of December 31, 2024, the Company had $2,635.9 million of equipment held in our operating lease portfolio, $183.6 million of notes receivable, $31.1 million of maintenance rights, and $21.6 million of investments in sales-type leases. As of December 31, 2023, the Company had $2,112.8 million of equipment held in our operating lease portfolio, $92.6 million of notes receivable, $9.2 million of maintenance rights, and $8.8 million of investments in sales-type leases. Average utilization (based on net book value) was approximately 83% and 84% for the years ended December 31, 2024 and 2023, respectively.
Maintenance Reserve Revenue. Maintenance reserve revenue for the year ended December 31, 2024 increased $80.2 million, or 60.0%, to $213.9 million from $133.7 million for the year ended December 31, 2023. Long-term maintenance revenue was $39.4 million for the year ended December 31, 2024 compared to $15.4 million for the year ended December 31, 2023. Long-term maintenance revenue is influenced by end of lease compensation and the realization of long-term maintenance reserves associated with engines coming off lease. Engines out on lease with "non-reimbursable" usage fees generated $174.5 million of short-term maintenance revenues for the year ended December 31, 2024 compared to $118.3 million for the year ended December 31, 2023, an increase of $56.2 million or 47.5%. The increase in short-term maintenance reserve revenue was influenced by an increase in the number of engines on short-term lease conditions, the timing of recognition of in-substance fixed payments, and the systematic, contractual increase in the hourly and cyclical usage rates on our engines.
Spare Parts and Equipment Sales. Spare parts and equipment sales for the year ended December 31, 2024 increased by $6.7 million, or 33.1%, to $27.1 million compared to $20.4 million for the year ended December 31, 2023. The increase in spare parts sales reflects the demand for surplus material that we are seeing as operators extend the lives of their current generation engine portfolios. Equipment sales for the year ended December 31, 2024 were $1.0 million for the sale of one engine. There were no equipment sales for the year ended December 31, 2023.
Interest Revenue. Interest revenue increased by $3.0 million, or 34.0%, to $11.7 million for the year ended December 31, 2024, from $8.7 million for the year ended December 31, 2023. The increase primarily reflects an increase in notes receivable related to failed sale-leasebacks in which the Company was the buyer-lessor and on sales-type leases.
Gain on Sale of Leased Equipment. During the year ended December 31, 2024, we sold 35 engines, eight airframes, and other parts and equipment from the lease portfolio for a net gain of $45.1 million. During the year ended December 31, 2023, we sold 28 engines, one airframe, and other parts and equipment from the lease portfolio for a net gain of $10.6 million.
Maintenance Services Revenue. Maintenance services revenue predominantly represents fleet management, engine and aircraft storage and repair services, and revenue related to management of fixed base operator services to third-party customers. Maintenance services revenue remained relatively flat for the year ended December 31, 2024.
Other Revenue.Other revenue increased by $1.2 million, or 14.6%, to $9.1 million for the year ended December 31, 2024 from $7.9 million in 2023. Other revenue consists primarily of managed service fee revenue related to the servicing of engines for the WMES lease portfolio. The increase for the year ended December 31, 2024 compared to that of the prior year primarily reflects increased managed service revenue. These services include management of the WMES lease portfolio, which occurs on an ongoing basis, as well as marketing, which occurs on a transactional basis.
Depreciation and Amortization Expense. Depreciation and amortization expense increased $1.5 million, or 1.7%, to $92.5 million for the year ended December 31, 2024 compared to $90.9 million for the year ended December 31, 2023. The increase is primarily due to an increase in the size of our lease portfolio.
Cost of Spare Parts and Equipment Sales. Cost of spare parts and equipment sales increased by $7.6 million, or 50.3%, to $22.9 million for the year ended December 31, 2024 compared to $15.2 million in the prior year period, reflecting the increase in spare parts and equipment sales. Cost of equipment sales were $0.1 million for the year ended December 31, 2024. There were no equipment or cost of equipment sales for the year ended December 31, 2023.
Cost of Maintenance Services.Cost of maintenance services increased by $3.3 million, or 15.6%, to $24.5 million for the year ended December 31, 2024, compared to $21.2 million for the for the year ended December 31, 2023. The increase is primarily related to an increase in personnel costs, as a result of expansion of our aircraft tear down and repair services business, as well as an increase in facility related costs.
Write-down of Equipment.Write-downs of equipment to their estimated fair values totaled $11.2 million for the year ended December 31, 2024, primarily reflecting an adjustment of the carrying value of one airframe and 11 engines. Write-downs of equipment to their estimated fair values totaled $4.4 million for the year ended December 31, 2024, primarily reflecting an adjustment of the carrying value of two airframes and five engines.
General and Administrative Expenses. General and administrative expenses increased by $31.0 million, or 26.8%, to $146.8 million for the year ended December 31, 2024 compared to $115.7 million in 2023. The increase primarily reflects a $35.5 million increase in personnel costs, partially offset by a $3.3 million decrease in other taxes related to international tax treaties. Increased personnel costs included approximately $14.4 million of costs related directly and indirectly to share-based compensation, which was influenced by the rapid appreciation of the market value of the Company's common stock. Share-based compensation included one-time special awards of $3.0 million and $1.7 million made at the direction of the Compensation Committee of the Board of Directors of the Company to our Executive Chairman and our President, respectively. Further, incentive compensation increased by $9.2 million as a result of full-year business performance to date as the Company's incentive compensation expense has historically been formulaically derived from consolidated pre-tax, pre-incentive compensation earnings.
Technical Expense. Technical expenses consist of the non-capitalized cost of engine repairs, engine thrust rental fees, outsourced technical support services, sublease engine rental expense, engine storage, and freight costs. These expenses decreased by $5.8 million, or 20.7%, to $22.3 million for the year ended December 31, 2024, compared to $28.1 million in 2023. The decrease is primarily due to a lower level of engine repair activity as compared to that of the prior period.
Net Finance Costs. Net finance costs increased by $26.0 million, or 33.0%, to $104.8 million for the year ended December 31, 2024, from $78.8 million for the year ended December 31, 2023, primarily due to an overall higher level of debt obligations, including increased borrowing costs. Interest expense associated with WEST VII Series A 2023 term notes payable increased by $25.0 million for the year ended December 31, 2024, as the notes payable was not issued until late 2023. Further, there was additional interest expense of $6.6 million for the year ended December 31, 2024 associated with WWFL, as the senior secured warehouse facility was not entered into until 2024. Additionally, derivative-related receipts were $12.0 million for the year ended December 31, 2024, as compared to $23.4 million for the year ended December 31, 2023, as certain swap positions ran off. These increases were offset by a decrease in interest expense of $18.2 million associated with the Company's credit facility for the year ended December 31, 2024, due to a decrease in the average outstanding balance of the credit facility over the course of the year.
Income Taxes. Income tax expense for the year ended December 31, 2024 increased by $20.7 million, or 88.6% to $44.0 million from $23.3 million for the comparable period in 2023. The effective tax rate for the years ended December 31, 2024 and December 31, 2023 was 28.8% and 34.8%, respectively. The decrease in the effective tax rate was predominantly due to a decrease in state taxes as a percentage of the overall rate.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2024, the Company had $132.5 million of cash, cash equivalents, and restricted cash. At December 31, 2024, $7.3 million in cash and cash equivalents and restricted cash were held in foreign subsidiaries.
We generate significant cash flow from our core business as evidenced by our net cash provided by operating activities, which was $284.4 million in 2024. Beyond cash provided through operations, we generally fund the growth of our business through a combination of equity and corporate borrowings secured by our equipment lease portfolio. Cash of approximately $1.3 billion and $625.7 million in the years ended December 31, 2024 and 2023, respectively, was derived from this borrowing activity. In these same time periods $840.0 million and $665.5 million, respectively, was used to pay down related debt.
Our credit facility and senior secured warehouse credit facility are our primary source of capital to grow our business. We also access the ABS and other markets to establish term fixed rate debt financing to better match our long-lived assets. The ABS market continues to be open for issuers like the Company. Refer to Note 5 of the consolidated financial statements for a detailed discussion of the Company's debt obligations.
Preferred Stock Dividends
In October 2016, the Company sold and issued to DBJ an aggregate of 1,000,000 shares of the Company's Series A Preferred Stock, $0.01 par value per share (the "Series A Preferred Stock") at a purchase price of $20.00 per share. The net proceeds to the Company after deducting investor fees were $19.8 million.
In September 2017, the Company sold and issued to DBJ an aggregate of 1,500,000 shares of the Company's Series A-2 Preferred Stock, $0.01 par value per share (the "Series A-2 Preferred Stock") at a purchase price of $20.00 per share. The net proceeds to the Company after deducting issuance costs were $29.7 million.
In September 2024, the Company entered into a Series A Preferred Stock Purchase Agreement with DBJ, which refinanced and expanded the Company's Series A-1 and Series A-2 Preferred Stock into one $65.0 million Series A Preferred Stock series (the "Series A Preferred Stock"), which accrues quarterly dividends at the rate per annum of 8.35% per share. The net proceeds after deducting issuance costs were $13.1 million.
The Company's Series A-1 Preferred Stock accrued quarterly dividends at the rate per annum of 6.5% per share through October 15, 2023 and accrued at the rate per annum of 8.5% per share thereafter through September 26, 2024. The Series A-2 Preferred Stock accrued quarterly dividends at the rate per annum of 6.5% per share. During the years ended December 31, 2024 and 2023, the Company paid total preferred stock dividends of $3.5 million and $3.2 million, respectively.
Cash Flows Discussion
Cash flows provided by operating activities were $284.4 million and $229.7 million in the years ended December 31, 2024 and 2023, respectively. The $54.7 million, or 23.8%, increase in operating cash flows was primarily driven by a 60.0% increase in maintenance reserve revenue, reflecting increased levels of usage fees resulting from high levels of travel and supply chain constraints. Additionally, payments received on sales-type leases increased $25.9 million, and changes in receivables contributed to $38.5 million of incremental operating cash flows as collections improved. Partially offsetting these increases in operating cash flows was a year over year $29.5 million decline in cash flows from changes in inventory, reflecting investment in parts of high demand engine types, and a $27.0 million decline in cash flows from changes in unearned revenue driven by the increase in long-term maintenance revenue recognition. Cash flows from operations are driven significantly by payments made under our lease agreements, which comprise lease revenue, security deposits, and maintenance reserves, and are offset by interest expense and general and administrative costs. Cash received as maintenance reserve payments for some of our engines on lease are partially restricted by our debt arrangements. The lease revenue stream, in the short term, is at fixed rates while a portion of our debt is at variable rates. If interest rates increase, it is unlikely we could increase lease rates in the short term and this would cause a reduction in our earnings and operating cash flows. Revenue and maintenance reserves are also affected by the amount of equipment off lease. Approximately 74% and 84%, by book value, of our assets were on-lease as of December 31, 2024 and 2023, respectively. Our year-end 2024 on-lease rate was influenced by a large, late December 2024 purchase of nine off-lease Pratt & Whitney GTF Advantage™ engines. The average utilization rate for the years ended December 31, 2024 and 2023 was approximately 83% and 84%, respectively. If there is an increase in off-lease rates or deterioration in lease rates that are not offset by reductions in interest rates, there will be a negative impact on earnings and cash flows from operations.
Cash flows used in investing activities were $764.9 million for the year ended December 31, 2024 and primarily reflected $830.5 million for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made during the year), and $101.8 million related to leases entered into during 2024 which were classified as notes receivable under ASC 842, partly offset by $171.2 million in proceeds from sales of equipment (net of selling expenses). Cash flows used in investing activities were $92.8 million for the year ended December 31, 2023 and primarily reflected $163.6 million for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made during the year), and $15.4 million related to a lease entered into during 2023 which was classified as a note receivable under ASC 842, partly offset by $85.1 million in proceeds from sales of equipment (net of selling expenses).
Cash flows provided by financing activities for the year ended December 31, 2024 were $445.0 million and primarily reflected $1,305.7 million and $13.1 million in proceeds from the issuance of debt obligations and preferred stock, respectively, partly offset by $840.0 million in principal payments, $11.6 million in new debt issuance costs, and $10.7 million in common stock cash dividends paid. Cash flows used in financing activities for the year ended December 31, 2023 were $57.9 million and primarily reflected $665.5 million in principal payments and $9.4 million in new debt issuance costs, partly offset by $625.7 million in proceeds from the issuance of debt obligation.
Debt Obligations and Covenant Compliance
At December 31, 2024, debt obligations totaled $2,264.6 million, net of unamortized debt issuance costs and note discounts, payable with interest rates varying between approximately 2.3% and 8.0%. Substantially all of our assets are pledged to secure our obligations to creditors. For further information on our debt instruments, see Note 5 "Debt Obligations" in Part II, Item 8 of this Form 10-K.
In October 2024, the Company entered into a new, $1.0 billion, five-year, revolving credit facility with a consortium of lenders, refinancing its $500.0 million credit facility. The purpose of the revolving credit facility is to finance the acquisition of equipment for lease as well as for general working capital purposes, with the amounts drawn under the facility not to exceed that which is allowed under the borrowing base as defined by the credit agreement. As of December 31, 2024 and 2023, $307.0 million and $355.0 million were available under this facility, respectively. On a quarterly basis, the interest rate is adjusted based on the Company's leverage ratio, as calculated under the terms of the revolving credit facility. Under the revolving credit facility, some subsidiaries except WEST III, WEST IV, WEST V, WEST VI, WEST VII, and WWFL jointly and severally guarantee payment and performance of the terms of the loan agreement. The guarantee would be triggered by a default under the agreement.
In May 2024, WWFL, a wholly-owned subsidiary of the Company, entered into a secured credit agreement with the Bank of Utah as security trustee and administrative agent and Bank of America, N.A. as facility agent. The secured credit agreement provides for a five-year non-recourse, senior secured warehouse credit facility with an availability period of two years and an initial committed amount of up to $500.0 million. The purpose of the senior secured warehouse credit facility is to finance the acquisition of equipment for lease as well as for general working capital purposes, with the amounts drawn under the facility not to exceed that which is allowed under the borrowing base as defined by the credit agreement. As of December 31, 2024, $278.1 million was available under this facility. On a quarterly basis, the interest rate is adjusted based on the Company's leverage ratio, as calculated under the terms of the senior secured warehouse credit facility. Pursuant to the secured warehouse credit facility, some subsidiaries except WEST III, WEST IV, WEST V, WEST VI, and WEST VII jointly and severally guarantee payment and performance of the terms of the loan agreement. The guarantee would be triggered by a default under the agreement.
In October 2023, the Company and its direct, wholly-owned subsidiary WEST VII, closed its offering of $410.0 million aggregate principal amount of fixed rate notes. The notes are secured by, among other things, WEST VII's direct and indirect interests in a portfolio of aircraft engines and airframes. The notes have a fixed coupon of 8.00%, an expected maturity in October 2029, and a final maturity date in October 2048. The notes were issued at a price of 98.84814% of par. Principal on the notes is payable monthly to the extent of available cash in accordance with a priority of payments included in the indenture.
The assets of WEST III, WEST IV, WEST V, WEST VI, WEST VII, and WWFL are not available to satisfy the Company's obligations other than the obligations specific to that WEST entity or WWFL. WEST III, WEST IV, WEST V, WEST VI, WEST VII, and WWFL are consolidated for financial statement presentation purposes. WEST III's, WEST IV's, WEST V's, WEST VI's, WEST VII's, and WWFL's abilities to make distributions and pay dividends to the Company are subject to the prior payments of their debt and other obligations and their maintenance of adequate reserves and capital. Under WEST III, WEST IV, WEST V, WEST VI, WEST VII, and WWFL, cash is collected in restricted accounts, which is used to service the debt and any remaining amounts, after debt service and defined expenses, are distributed to the Company. Additionally, a portion of maintenance reserve payments and lease security deposits are formulaically accumulated in restricted accounts and are available to fund future maintenance events and to secure lease payments, respectively. The WEST III, WEST IV, WEST V, WEST VI, WEST VII, and WWFL indentures require that a minimum threshold of maintenance reserve and security deposit balances be held in restricted cash accounts.
Virtually all of the Company's debt requires ongoing compliance with the covenants of each financing, including debt and tangible net worth ratios, minimum interest coverage ratios, and other eligibility criteria including asset type, customer and geographic concentration restrictions. The Company also has certain negative financial covenants such as liens, advances, changes in business, sales of assets, dividends and stock repurchases. Compliance with these covenants is tested either monthly, quarterly, or annually, as required, and the Company was in full compliance with all financial covenant requirements at December 31, 2024.
At December 31, 2024, we were in compliance with the covenants specified in our revolving credit facility, including the Interest Coverage Ratio requirement of at least 2.25 to 1.00, and the Total Leverage Ratio requirement of not greater than 4.50 to 1.00. The Interest Coverage Ratio, as defined in the credit facility, is the ratio of earnings before interest, taxes, depreciation and amortization and other one-time charges to consolidated interest expense. The Total Leverage Ratio, as defined in the credit facility, is the ratio of total indebtedness to tangible net worth. At December 31, 2024, we were in compliance with the covenants specified in the WEST III, WEST IV, WEST V, WEST VI, WEST VII, and WWFL indentures and servicing and other debt related agreements.
Contractual Obligations and Commitments
Repayments of our gross debt obligations primarily consist of scheduled installments due under term loans and are funded by the use of unrestricted cash reserves and from cash flows from ongoing operations. The table below summarizes our contractual commitments at December 31, 2024:
| Payment due by period (in thousands) | |||||||||||||||||||||||||||||
| Total |
Less than 1 Year |
1-3 Years | 3-5 Years |
More than 5 Years |
|||||||||||||||||||||||||
| Debt obligations | $ | 2,292,726 | $ | 70,690 | $ | 462,253 | $ | 1,704,231 | $ | 55,552 | |||||||||||||||||||
| Interest payments under debt obligations | 548,240 | 132,103 | 239,030 | 172,410 | 4,697 | ||||||||||||||||||||||||
| Purchase obligations | 374,567 | 107,609 | 266,958 | - | - | ||||||||||||||||||||||||
| Operating lease obligations | 6,372 | 3,161 | 1,924 | 1,078 | 209 | ||||||||||||||||||||||||
| Total | $ | 3,221,905 | $ | 313,563 | $ | 970,165 | $ | 1,877,719 | $ | 60,458 | |||||||||||||||||||
From time to time we enter into contractual commitments to purchase engines directly from original equipment manufacturers. We are currently committed to purchasing six additional new LEAP-1B engines and 15 additional new LEAP-1A engines for an aggregate total of $374.6 million by 2027. Our purchase agreements generally contain terms that allow the Company to defer or cancel purchase commitments in certain situations. These deferrals or conversions would not result in penalties or increased costs other than any potential increase due to the normal year-over-year change in engine list prices, which is akin to ordinary inflation.
In December 2020, we entered into definitive agreements for the purchase of 25 Pratt & Whitney aircraft engines. As part of the purchase, we have committed to certain future overhaul and maintenance services which are anticipated to range between $93.3 million and $121.4 million by 2030.
$297.1 million of variable interest payments due under debt obligations, scheduled above, are estimated by applying the interest rates applicable at December 31, 2024 to the remaining debt, adjusted for the estimated debt repayments identified in the table above. Actual interest payments made will vary due to actual changes in the rates for one-month term SOFR.
We believe our equity base, internally generated funds and existing debt facilities are sufficient to maintain our level of operations through 2025. A decline in the level of internally generated funds could result if the amount of equipment off-lease increases, there is a decrease in availability under our existing debt facilities, or there is a significant step-up in borrowing costs. Such decline would impair our ability to sustain our level of operations. We continue to discuss additions to our capital base with our commercial and investment banks. If we are not able to access additional capital, our ability to continue to grow our asset base consistent with historical trends will be impaired and our future growth limited to that which can be funded from internally generated capital.
MANAGEMENT OF INTEREST RATE EXPOSURE
At December 31, 2024, $914.9 million of our borrowings were on a variable rate basis at various interest rates tied to one-month term SOFR. Our equipment leases are generally structured at fixed rental rates for specified terms. Increases in interest rates could narrow or result in a negative spread between the rental revenue we realize under our leases and the interest rate that we pay under our borrowings. Historically, we have entered into interest rate derivative instruments to mitigate our exposure to interest rate risk; such investments are not intended to speculate or trade in derivative products. As of December 31, 2024, we have six interest rate swap agreements. During 2021, the Company entered into four fixed-rate interest swap agreements, each having notional amounts of $100.0 million, two of which matured during the year ended December 31, 2024 and two of which had remaining terms of 13 months as of December 31, 2024. One interest rate swap agreement was entered into during 2019, having a notional amount of $100.0 million, which matured during the year ended December 31, 2024. During the year ended December 31, 2024, the Company entered into three fixed-rate interest swap agreements, each having notional amounts of $50.0 million, and with remaining terms of 53 months as of December 31, 2024. During the year ended December 31, 2024, the Company also entered into one fixed-rate interest swap agreement, having a notional amount of $75.0 million, and with a remaining term of 53 months as of December 31, 2024. The derivative instruments were each designated as cash flow hedges at inception and recorded at fair value. The net fair value of the interest rate swaps as of December 31, 2024 and December 31, 2023 was $11.0 million and $16.5 million, respectively, each representing an asset and reflected within Other assets on the Consolidated Balance Sheets.
We record derivative instruments at fair value as either an asset or liability. We have used derivative instruments (primarily interest rate swaps) to manage the risk of interest rate fluctuation. While substantially all of our derivative transactions are entered into for the purposes described above, hedge accounting is only applied when specific criteria have been met and it is practical to do so. In order to apply hedge accounting, the transaction must be designated as a hedge and the hedge relationship must be highly effective. The hedging instrument's effectiveness is assessed utilizing regression at the inception of the hedge and either regression or qualitative analysis on at least a quarterly basis throughout its life. All of the transactions that we have designated as hedges are accounted for as cash flow hedges. The effective portion of the gain or loss on a derivative instrument designated as a cash flow hedge is reported as a component of other comprehensive income and is reclassified into earnings in the period during which the transaction being hedged affects earnings. The ineffective portion of these hedges flows through earnings in the current period. The Company recorded an adjustment to interest expense of $(12.0) million and $(23.4) million during the years ended December 31, 2024 and 2023, respectively, from derivative investments.
For any interest rate swaps that we enter into, we will be exposed to risk in the event of non-performance of the interest rate hedge counter-parties. We anticipate that we may hedge additional amounts of our floating rate debt in the future.
RELATED PARTY TRANSACTIONS
Joint Ventures
"Other revenue" on the Consolidated Statements of Income includes management fees earned of $4.8 million and $2.4 million during the years ended December 31, 2024 and 2023, respectively, related to the servicing of engines for the WMES lease portfolio.
During 2024, the Company sold four engines to WMES for $50.5 million, which resulted in a net gain of $12.7 million for the Company. During 2023, WMES sold one engine to the Company for $22.3 million, and the Company sold two engines to WMES for $28.8 million, which resulted in a net gain of $6.5 million for the Company.
Other
During 2024, the Company paid approximately $0.1 million expense to Mikchalk Lake, LLC, an entity in which our Executive Chairman retains an ownership interest. These expenses were for lodging and other business-related services and were approved by the Board's Independent Directors.