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Textainer Group Holdings Limited (NYSE:TGH)

Q4 2012 Earnings Call

February 12, 2013 11:00 AM ET

Executives

Hilliard Terry – EVP and CFO

Phil Brewer – President and CEO

Robert Pedersen – President and CEO of Textainer Equipment Management Limited

Analysts

Josh Katzeff – Deutsche Bank

Michael Webber – Wells Fargo

John Mims – FBR Capital Markets

Helane Becker – Dahlman Rose

Ken Hoexter – Bank of America Merrill Lynch

Sal Vitale – Stern Agee

Bill Carcache – Nomura Securities

Doug Mewhirter – SunTrust Robinson Humphrey

Daniel Furtado – Jefferies

Brian Hogan – William Blair

Operator

Welcome to the Textainer Fourth Quarter Earnings Conference Call. My name is John and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note this conference is being recorded.

I will now turn the call over to Mr. Hilliard Terry. Mr. Terry, you may begin.

Hilliard Terry

Thank you, John, and welcome to our 2012 year-end earnings conference call.

Joining me on this morning’s call are Phil Brewer, TGH President and Chief Executive Officer and at the end of our prepared remarks, Robert Pedersen, TEM President and Chief Executive Officer will join us for the Q&A.

Before I turn the call over to Phil, I’d like to point out that this conference call contains forward-looking statements in accordance with U.S. Securities Laws. These statements involve risk and uncertainties are only prediction and may differ materially from the actual future events or results.

Finally, the company’s views, estimates, plans and outlook as described within this call may change subsequent to this discussion. The company is under no obligation to modify or update any or all statements that are made.

Please see the company’s Annual Report on Form 20FA for the year ended December 31, 2011 filed with the Securities and Exchange Commission on June 27, 2012 and the Form 6Ks the company files quarterly with the SEC for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.

I would also like to point out that during this call, we will discuss non-GAAP financial measures as such measures are not prepared in accordance with Generally Accepted Accounting Principles, a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure will be provided either on this conference call or can be found in today’s earnings press release.

Now, I’d like to turn the call over to Phil.

Phil Brewer

Thank you, Hilliard. Welcome to Textainer’s fourth quarter earnings conference call. 2012 was an incredible year for Textainer. To put our 2012 performance and perspective, I would like to go back in time and read my opening lines that Textainer’s fourth quarter 2011 earnings call, by every meaningful measure or performance 2011 was the best year in Textainer’s history. We set new records for revenues, profitability, fleet size, percentage of the fleet subject to term and finance fleets, utilization, capital expenditures and dividends, end quote. With the exception of the utilization the same can be said about both our fourth quarter and year-end 2012 results.

Let me review some of the highlights. Most significantly during 2012, we invested a record of almost $1.2 billion for 548,000 TEU of new and used containers including $192 million for purchases for our managed fleet. In 2011, we invested $935 million, at that time a record by several hundred million dollars, yet 2012 bettered that record by more than 25%. Record revenues of $127 million for the quarter and $487 million for the full-year, increases of 9.4% and 15.2% for the prior quarter and year respectively.

Third, net income attributable to shareholders was $61 million or $1.07 per diluted common share for the quarter, an increase of 10.3% from the prior year quarter and $207 million or $3.96 per diluted common share for the full-year, a new record, increases of 9.1% and 4.2% from the prior quarter and year.

Fourth, at the start of the year, we owned 59% of our fleet. Today, we own 73% of our fleet, the highest percentage in the company’s history due to several factors: first, 91% of our CapEx was for our owned fleet. Second, we have an aggressive new build program. Third, we continually seek opportunities to purchase managed containers which since the containers are already on lease generating cash or immediately accretive.

Fifth point, in September, we accessed the equity markets for the first time since our IPO raising $282 million by the sale of primary and secondary shares. Our significant investments in new and managed containers and purchase leaseback transactions during the fourth quarter demonstrated that we were able to rapidly invest the proceeds of the offering to the benefit of both old and new shareholders. Textainer’s return – I’m sorry, next point, Textainer’s return on equity, equity for 2012 was 26%, exceeding our average annual return on equity of 24% since we went public in 2007. This result is even more impressive when you consider that we are the least highly levered of all of our public competitors.

And finally, Textainer pays a $0.44 per share dividend in the fourth quarter and declared a $0.45 per share dividend in the first quarter of 2013. This is Textainer’s 12th consecutive quarterly increase and continues our record of stable or increasing dividend every quarter since our IPO. I noted at the beginning that we did not set a new utilization record. Nonetheless utilization continued at very high levels averaging 96.7% during the fourth quarter and 97.2% for 2012.

Utilization is currently 95.8%. We expect utilization to be lower on average during 2013 and 2012. However, with 82% of our fleet subject to term and finance leases, we do not expect a significant change in utilization this year. Utilization included we are extremely pleased with our 2012 results. Looking forward there are many reasons to be optimistic about 2013. Following are some of the reasons why the outlook for our industry remains compelling: first, manufacturers expect to produce 2.7 million TEU in 2013, versus 2.5 million TEU during 2012.

Lessors is expected to purchase 70% or more total production in 2013 versus 65% in 2012. Container prices are expected to behave similarly for 2012 and are currently around $2,300. Prices at these levels not only encourage leasing instead of buying by shipping lines but also help to support our residual values. Shipping lines were best marginally profitable in 2012, meaning cash available for container purchases remained limited.

Bank lending to the shipping industry continues to be restrained. Shipping lines are expected to continue their recent entries and disposals. This means that they will need to lease replacement containers and also provides opportunities for purchase leasebacks and trading deals. It is also true that yields on new containers remain under pressure. We do not expect that to change before the end of the first quarter and as a result are being selective in determining which deals to pursue.

While the overall outlook for our industry is good, we need to recognize that the uncertainty facing shipping lines could have an impact. It is important to monitor the following factors. The shipping line focus on profits of our markets share is precarious. If one major line tries to grow market share, it could upset the applecart. The outlook for improved freight rates is mixed. Shipping lines are expected to have more difficulties in forcing freight rate increases this year than last year.

The problem with the excess vessel capacity remains. Idle lessor inventories currently at 5% to 6%. New vessel capacity equal to 10% of the existing fleet is coming online in 2013, compare this to the project growth and trade this year of 46%. On balance, we are very optimistic that 2013 will be a very good year for the industry in general and Textainer in particular. Indeed we are already off to a good start with over $95 million invested in new and used containers and we will have the benefit of a full-year of cash flow for the managed containers we’ve purchased late last year.

I will now turn the call over to Hilliard.

Hilliard Terry

Thank you, Phil. The fourth quarter marked the close of a phenomenal year for Textainer and as Phil mentioned this year marked a number of milestones in the history of the company.

Turning to the quarterly results, we recorded a $127 million of total revenues, topping the quarterly record we set last quarter. Revenue growth was 9% above a year ago period. The primary driver of our revenue growth was the increase in lease rental income as a result of the 26% increase in the size of our owned fleet as we continued to purchase new and used containers.

We made a number of managed fleet acquisitions and executed several purchase lease back transactions as we continue to successfully deploy the capital raised during our recent equity offering. This quarter’s revenue growth was partially offset by lower management fees because of the decrease in the size of our managed fleet.

Total operating expenses were up 13% year-over-year primarily driven by the increase in depreciation expense which is the largest component of total operating expenses. Also direct container expenses increased by 37% as storage costs increased due to slightly lower utilization rates in the quarter.

Depreciation expense was $34 million for the quarter, up $12 million or 56% as a result of our larger owned fleet, and in line with the 53% increase in the book value of the container assets on our balance sheet. Our bad debt expense was a recovery of $1.6 million as we recorded a settlement and the successful collection of previously reserved items. In general, the environment remains challenging for our customers but we believe they are in a better off than in previous years.

We continue to believe our bad debt expense should remain within the normal range of 0.5% to 1% of revenue. Below the operating income line, interest expense is $20 million for the quarter versus $15 million in the year ago quarter. The $5 million increase was primarily due to $536 million of additional debt used to fund the expansion of our fleet. At the end of the year, we were very pleased to acquire the majority interest in TAP Funding Limited, a company that owned a 99,000 TEU fleet of containers that we currently manage.

Because of the fair value portion of TAP’s net assets we acquired exceeded the cash we paid for the company, we recognized a bargain purchase gain of $9.4 million on the acquisition. We expect the returns on this investment to outperform our investments in new containers. Adjusted EBITDA of $115 million represents another quarterly record and was up 29% year-over-year. This is a clear indication of our strong and increasing cash flow.

Adjusted net income which excludes unrealized gains on interest rates swaps for the quarter was $58 million, up 10% year-over-year resulting in adjusted EPS of $1.3 per share. Based on the stability of our results, we have increased our dividend to $0.45 per share representing 44% of our adjusted net income. Dividends have average 44% of adjusted net income since our IPO, enabling the company to retain capital for growth and return cash to our shareholders.

We have paid increasing dividends for 12 consecutive quarters. It’s an important part of our total return that we provide to our shareholders. The Board had targeted a dividend payout of 40% to 50% of adjusted net income but it takes a fresh view every quarter and sets the dividend subject to our cash needs and the investment opportunities that are available to us.

We maintained a strong balance sheet during the quarter. As of December 31, 2012, our cash position was $100 million with standby or available liquidity in excess of $573 million. Total assets were $3.5 billion and our leverage ratio was 2.2 to 1. We completed approximately $2.4 billion of financing in the debt and equity markets this past year, resulting in over $1.3 billion of incremental net funding. We are extremely confident in our ability to access the capital markets to make sure we remain in a position to take advantage of the market opportunities to grow our business.

Financing spreads have continued to tighten throughout the year and growing investor interest in container asset investments continue to translate into more liquidity for container ABS issuances. We are continuously working to optimize our capital structure for growth and opportunistically expand our financing alternatives.

In closing, Q4 included a spectacular year for Textainer. We’re very proud of the annualized return on equity, we’ve been able to deliver as a public company over the last five years.

I want to thank you for your attention. We look forward to seeing many of you at the upcoming conferences and investor meetings throughout the quarter. At this point, I’d like to open the call up for questions. John, can you inform the participants the procedures for the Q&A?

Question-and-Answer Session

Operator

Thank you. We will now begin the questions and answers session. (Operator Instructions) Our first question comes from Justin Yagerman from Deutsche Bank. Please go ahead.

Josh Katzeff – Deutsche Bank

Good morning, it’s Josh Katzeff on for Justin.

Phil Brewer

Good morning, how are you?

Josh Katzeff – Deutsche Bank

I just want to start off on looking at 2013 and growth, 2012 was certainly a big year with $1 billion of purchasing for your own fleet. How should we think about 2013 compared to 2012, I know you guys don’t give the specifics but are you expecting to potentially – or is there a possibility to outpace 2012 and 2013 or you’re trying to kind of beat 2012 levels or..?

Phil Brewer

Well I know we get asked that question every call and our answer tends to be the same which is we really monitor the market conditions as the year progresses and investment to the opportunity to make a return that we feel is attractive on our cash. At this point, I’d say it’s very difficult to predict how much we’re going to invest this year. The first quarter – although we’ve started off the year strongly, I think we’re going to see a little bit of a slowdown in the very immediate future, there is a supply of new container sitting at factories that will likely go out over the first and into the second quarter. And I think we’ll see CapEx start to pickup after that.

So it’s very difficult to predict right now what level of CapEx we might see over the course of this year.

Josh Katzeff – Deutsche Bank

Fair enough. I definitely appreciate the color. As far as kind of the breakdown of what you’re seeing in the market, you mentioned the weakened yields, I guess how much of what you’ve spent already is been kind of in the second hand market versus new containers? And I guess how do you view the second half portfolio is going forward this year? Do you expect it to be as strong as last year?

Phil Brewer

You mean the purchases of – the purchase leaseback or trading containers?

Josh Katzeff – Deutsche Bank

Yes.

Phil Brewer

That business picked up pretty strongly towards the very end of the last year in the third and fourth quarters of last year. We expect to see an increase in that business. This year we’ve already seen a lot of activity in the first quarter as well. So our expectation is that over the course of this year, that will be a big part of not just Textainer but frankly all the container leasing companies will be looking at those transactions.

Josh Katzeff – Deutsche Bank

Got it. And was that a big part of the year-to-date, spending that $95 million?

Hilliard Terry

Yes, it was roughly – it was the majority of it.

Josh Katzeff – Deutsche Bank

Got you.

Hilliard Terry

Two-thirds.

Josh Katzeff – Deutsche Bank

Two-thirds?

Hilliard Terry

Yes.

Josh Katzeff – Deutsche Bank

So I guess you are not expecting such a big run up in the dry box season going into peak season this year, or do you expect to see a lot of activity and can you maybe talk to where yields are or where you’re seeing yields in the market not necessarily where you’re doing them but where they’re being priced in the market?

Robert Pedersen

Well we think this year is progressing more or less like the last two years where it appears that second quarter is actually the peak season. And while the time up to Chinese New Year which is right now was not as strong as we’ve seen in the past. The inquiries for later deliveries have actually been very significant, so we do expect a strong second quarter going into the third quarter.

Josh Katzeff – Deutsche Bank

And then one more, sorry…

Hilliard Terry

And on the yield side as you mentioned, I mean the yields are under pressure but it’s just a matter of how many deals are out there versus how many containers are available at the time of operating supply and demand issue and our strategy on yields have not changed since earlier calls.

Josh Katzeff – Deutsche Bank

And then just one more before I turn it over, you mentioned utilization and if I heard it correct, it was 95.8%, right now?

Phil Brewer

That’s correct.

Josh Katzeff – Deutsche Bank

And then do you expect it to be pretty flat this year, I mean are you guiding towards – are you expecting to see around that 96% level for utilization this year?

Phil Brewer

I think that’s a pretty fair assumption, you know when you have 80% plus of your fleet on term and finance leases it’s difficult to see a dramatic change in utilization in any direction frankly. I think right now what we’re seeing is a fair estimate of where we might see it. We actually do expect utilization to remain around this level. It’s been around this level now for several weeks, so we expect it to remain around this level for the immediate future but into the second quarter and third quarter, we expect to see a utilization improve slightly.

Josh Katzeff – Deutsche Bank

Well I appreciate the time this morning. Thank you, guys.

Hilliard Terry

Thank you very much.

Operator

Our next question comes from Michael Webber from Wells Fargo. Please go ahead.

Michael Webber – Wells Fargo

Hi good morning guys, how are you?

Phil Brewer

Hi Michael, how are you? Good morning.

Michael Webber – Wells Fargo

Good. I just wanted to follow-up on a couple of Josh’s question, maybe just kind of sticking high level here before we start talking about kind of the incremental Q1 numbers, but I think Phil in your remarks I think you mentioned 2.7 million containers produced maybe in the release 2.7 million containers produced this year and it’s about 5% to 6% growth and you kind of lay around a 70/30 split, it kind of points to 88.50 [ph] in CapEx for you guys. You guys have clearly been doing more than that. I am just curious as to whether or not you guys are obviously gaining share, are you as an individual lessor, or you think you’re gaining share away from other lessors in the space because of your access to capital, I mean there is a pretty big delta between where the numbers would imply what you do versus what you guys have been able to spend year-to-date and if that is the case, what do you think is driving that?

Phil Brewer

Well I think we’ve made that argument that we’ve had – made that point in past discussions that we’ve had some people look at us and say largest in the industry, it’s very difficult to grow but if you look at our CapEx relative to our position in the industry year-over-year, we have outspent our competitors relative to our position in the industry. We certainly expect that to continue to happen. The number that you calculated earlier sort of back of the envelope was really based on Michael was I think based just on new CapEx.

Michael Webber – Wells Fargo

Yes.

Phil Brewer

A new containers and don’t forget we do have other alternatives such as purchasing, purchase lease-backed containers which we mentioned just a while ago, we think it will be a big part of business for everybody this year. And continuing to purchase containers for our managed fleet, which to preempt any questions on that, it’s something that is extremely difficult for us to project because it depends on the needs and desires of the individual owners of the containers, but when those opportunities arrive as we’ve demonstrated in the past, we’re very eager to pursue them.

Michael Webber – Wells Fargo

Got you. Now that makes sense. And just then kind of thinking about the assets like for last year or two, I am not sure to saying it’s been predictable but it seems like it’s kind of settled into a bit more of a normalized pattern. And I am just kind of looking at that $1.2 million spend for 2012 and then what you guys have done year-to-date in 2013, it depicts that you guys are kind of pulling forward a little bit of CapEx from the first part of the year just based on the note, just based on the economics of being able to cheaply store those assets kind of anticipation of what you might need later on in the year. And if so, how bigger chunk of containers are we talking, about that you think you guys have been able to pull forward just based on a more bigger comfort level with where asset values are going?

Phil Brewer

Well as to one part of your question, when container prices fall towards the end of the year, if you look at purchasing container at that time you’ll see that it often makes sense to pay it a less expensive prices and carry the containers for a while versus waiting until later in the year when the prices may run up. That’s a far more attractive proposition to pay the lower prices.

So yes, some of the containers that we purchased towards the end of the last year are containers that are – that we fully intended at the time we purchased them to hold them up for a while and put them put on lease later this year.

Michael Webber – Wells Fargo

All right, that’s helpful. Just to dive into, you mentioned ratio I got is right, of the $95 million year-to-date roughly two-thirds were sale leaseback. At what point in the quarter did that actually hit your overall fleet?

Hilliard Terry

Well let me be clear, roughly about two-thirds are used containers.

Michael Webber – Wells Fargo

Okay.

Hilliard Terry

And then a third were purchases of new containers.

Michael Webber – Wells Fargo

Okay. So that the used containers which I am assuming are going to be immediately accretive, at what point, very early in the quarter or more kind of more towards where we are today?

Phil Brewer

Well we’re only a month and two weeks into the quarter but I think it’s fair to assume that there was sort of spread that the transactions were spread out over the beginning of the year.

Michael Webber – Wells Fargo

Okay. All right, that’s helpful. Just a couple of more and I’ll turn it over, I think Josh mentioned – you talked a little bit about the lack of a peak season and it certainly seems like we’re – 2013 is shaping up a bit like 2012 and if they’re not really seeing people materialize, are you guys seeing that play out in terms of what you’re expectations are for CapEx spend throughout the year that maybe this year, it’s going to be a little bit more steady in terms of what the third party capacity needs are for the container lines. Does that kind of permeate the way you guys think about buying containers are you still think we’re going to get a pretty decent ramp coming here in the next couple of months?

Hilliard Terry

We think end of 2012 and early 2013 was actually more active than we saw a year ago. We thought it would be even better, but it is certainly better than it was a year ago. Basically if you look at 2012, the market didn’t take off before April. And kind of ramping up a little bit mid March but April was the big boom last year and we see that happening again but part of that has already started to happen right now with people clearly booking ahead.

Michael Webber – Wells Fargo

Okay.

Robert Pedersen

I think the things Mike when you look at it over there is no global surplus of containers. If you look at underlying there was no global surplus at this stage here. There is a need for fleet renewal. There is growth and there will be opportunities to grow both our fleet but also leasing company fleets in 2013.

Phil Brewer

And if I could just add to what Robert is saying when you look at the vessel capacity that’s coming online this year, that’s clearly going to lead to a demand for containers as well. And there certainly has not been anything that’s happened to change our perception that the shipping lines are relying more and more on the leasing companies to provide containers, so that change continues this year. We expect it to continue for the foreseeable future and as the percentage of containers being purchased by leasing companies will increase. So you have a higher level of production and a higher level of purchases by the industry as a whole, we think that this year looks as very positive outlook for our industry in Textainer.

Michael Webber – Wells Fargo

Sure and I just kind of really question to that, Robert you mentioned that the oncoming vessel supply and obviously that box to slot ratio is falling considerably probably sub two now. Is there a floor there, where you think we’ll actually we’ll just an uptick in box pictures simply because that ratio have gotten too low and the lines it is comfortable with how low its gotten, that’s the one way to think about it.

Robert Pedersen

Well Michael, it’s tough to talk about the slot box ratio right now because the vessels are not pulled.

Phil Brewer

Yes.

Robert Pedersen

Really need to see a different environment here, you need a stronger Europe before you can come with a good to strong guest in that regard, as clearly the lines are out to control costs and improve efficiency is a very incremental part of that but I think it’s difficult to dwell too much in those numbers right now with the different straight the way they are going.

Michael Webber – Wells Fargo

Okay. Fair enough. One more for me and I’ll turn it over, I think I asked this Hilliard about this last quarter as well but you guys have been very active in the ABS market, you’ve got some callable issues out there and potentially refi some of those and have some meaningful savings from an EPS perspective. What are your thoughts on potentially refi on some of that ABS debt in the first half of the year?

Hilliard Terry

I think everything you stated is correct. We do have a particular note that is callable if we were to refinance it, we can stabilize [ph] in terms of the coupon that we’d be paying. So we are looking at that and the bottom line is in the ABS markets, spreads have continued to tighten so every deal that’s gone out there you’ve seen an improvement in terms of financing costs. So it’s appropriate.

Michael Webber – Wells Fargo

Okay, all right, thanks for the time guys. I appreciate it.

Phil Brewer

Thank you, Michael.

Operator

Our next question comes from John Mims from FBR Capital Markets. Please go ahead.

John Mims – FBR Capital Markets

Hi, good morning guys.

Phil Brewer

Good morning John.

John Mims – FBR Capital Markets

I think most of my questions have been answered. When you – let me just go back, Phil maybe when you look at this – the fact with 73% of the fleet is now owned, I guess intuitively that means the pool of managed acquisitioned that are possible is shrinking, right, and I know you don’t know the timing and understanding that that could happen at any point. Of those that are left, that are still managed, what percentage are you at least actively talking to which – there are potential that you could bring on if it’s not this year in the next year or so?

Phil Brewer

100%. So anybody we managed containers for we’re in a dialog with over the course of the year about whether or not they are interested in selling their containers when they might be interested in selling their containers. So that’s ongoing. And then just to reiterate, why it’s so hard to predict the sales, is that it has happened many times where we’ve had discussion with one of the owners who said no, they are not interested and literally within two weeks later, top calls up and said you know, actually now might be an interesting time to sell.

So it’s very difficult for us to give any projections as we really don’t know but it is very attractive business. You’re right, the pool is smaller. Nonetheless we do expect to find those opportunities over the course of the year. They are immediate accretive, the containers are all out on lease, we don’t have to put them out on lease. So it’s very nice business for Textainer.

John Mims – FBR Capital Markets

Sure, that makes sense. But just in terms of potential CapEx spend or how that may look next year, if you were to grow at the same rate as you did in the 2012 or even as the industry backdrop would suggest you have a little bit stronger ‘13 than ‘12. Does that mean on a pound for pound basis you would have to put more money to work, buying new containers just because the managed pool is that much smaller? Does that makes sense?

Phil Brewer

Let me see if I understand your question correctly. Are you saying that as our managed pool shrinks and as we’re growing our fleet since more of them are for our account, then our CapEx spend is larger because less is the cash is coming the owners, I mean...

John Mims – FBR Capital Markets

No, I am saying purely that to get the same amount of fleet growth, the new containers are more expensive than buying out of the managed fleet. So you could theoretically put more capital to work for the same amount of like absolute TEU growth, correct?

Phil Brewer

Yes, correct. If we’re buying used containers clearly that we’re paying a price that’s below the price of a new container. Well and that applies not just to buying containers out of our managed fleet but buying purchase leaseback containers from the shipping lines, purchase lease back opportunities that we’ve said are up, we think that they are going to continue to be up this year, literally we see opportunities coming to us every single week.

And that started in the fourth quarter last year. Prior to that, we hadn’t seen this type of activity in the purchase leaseback market for a few years.

John Mims – FBR Capital Markets

Good. It’s good, thank you. And just a file on the build market, can you comment on kind of where container box prices are now, how the backlog, lead times look and when (inaudible) and everybody else goes back to work after – how long of a break they take for the Lunar New Year?

Robert Pedersen

Well it’s probably different from manufacture to manufacture but I mean they will probably take a two to three week break. The lead times are still about one to two months and prices are about $2,300 per cost equivalent. And that is slightly up compared to where we ended last year and bought early this year.

Phil Brewer

And I would add on that, because I know Robert and I have discussed this recently, once they come from Chinese New Year we think that the manufacturers are likely to put in a pretty concerted effort to bring prices up further beyond that level.

John Mims – FBR Capital Markets

But still within that kind of one to two month lead times, they are not quoting out to April or May now?

Robert Pedersen

No, not to our experience.

John Mims – FBR Capital Markets

Right. Is there any particular changes and mix as far as what you’re ordering or what the market is looking for in terms of dry versus reaper?

Hilliard Terry

No, the mix is very similar, typically the beginning of the year pile a bit more 20 foot containers and later on we do add more high cubes, and the reapers are pretty steady, so no big surprises there.

John Mims – FBR Capital Markets

Okay, I think that’s all I got. Thanks for the time.

Hilliard Terry

Thank you.

Operator

Our next question comes from Helane Becker from Dahlman Rose. Please go ahead.

Helane Becker – Dahlman Rose

Thanks very much operator. Hi, gentlemen, thanks for the time. Most of my questions were answered. I just kind of wanted the mix between reapers versus dry if you have that, because I don’t see that in the press release? And then I just had a question about yields, I thought I heard you say that yields had come under pressure, but maybe I misheard that because it doesn’t make sense if utilization is over 95% and thinks are showed some signs of improving that yields would be under pressure? Thank you.

Robert Pedersen

Well let me answer the first question, I mean we allocated plus minus 20% of our total CapEx to reapers and that has been that level in the past two years and we see that approximate level going forward. It can change a little bit from month to month and even quarter to quarter but throughout the year, it’s about 20% of our total CapEx. And on the yield side, yes, there is a difference between utilization and the competitiveness of new transactions.

When we talk about utilization, that’s obviously both new production and all our in-fleet, while when various people are loading up in the beginning of the year and they are only so many deals than you have more players, exactly the same transactions and so those margin on transactions become more competitive despite a high fleet utilization.

Helane Becker – Dahlman Rose

Okay. Have you noticed, or I don’t know that it really matters for you guys but have you noticed any diversion away from the port of Long Beach and L.A. to other ports on the West Coast?

Phil Brewer

Not really, we have not seen that at this stage here.

Helane Becker – Dahlman Rose

Okay, thank you.

Phil Brewer

Thank you Helane.

Operator

Our next question comes from Ken Hoexter from Bank of America. Please go ahead.

Ken Hoexter – Bank of America Merrill Lynch

Great, good morning. Phil, the trading containers, the proceeds dropped almost in half sequentially, is that kind of a sign of what you’re seeing the market or is something driving that?

Phil Brewer

Well we actually didn’t – the opportunities we’ve been seeing have been more purchase leaseback oriented than trading deals. So the main difference is the trading deals somebody is selling you the containers straight away the purchase leaseback you buy them and they return them to you over a period of time which can vary from a few months, a year to several years. There is – most of the deals we’ve seen lately have been purchased leaseback transactions not trading transactions as a result the proceeds from trading deals has declined.

Ken Hoexter – Bank of America Merrill Lynch

Okay and then I guess sticking to that, you mentioned the storage costs are going up, is that because you’re – I think Phil mentioned before you’re taking delivery early knowing it’s going to be weak first half or is that – are storage costs going up because of your utilization declining and then where do you see that going forward?

Hilliard Terry

Well again it was purely a comment on the fact the utilization had declined slightly so therefore storage costs were going up. So if we expect utilization to be about the same then we would expect that to be consistent.

Ken Hoexter – Bank of America Merrill Lynch

So I am sorry, you said utilization would be consistent so then your cost stay similar?

Hilliard Terry

Correct.

Ken Hoexter – Bank of America Merrill Lynch

Okay. And then I think on the last question you noted the prices about $2,300 per cost equivalent. Has that changed much over the last couple of months, has it been pretty steady?

Robert Pedersen

It increased by about $100 since New Year.

Ken Hoexter – Bank of America Merrill Lynch

Just since the beginning of the year?

Robert Pedersen

That’s correct.

Ken Hoexter – Bank of America Merrill Lynch

And then you mentioned you expect that to go up, what pace is – there an annual rate increase or if they talked about a rate increase that they are targeting?

Robert Pedersen

Well we can’t really comment on how much they talk or don’t talk but we would be surprised if there is not some sort of combined effort to get prices back about $2,500.

Ken Hoexter – Bank of America Merrill Lynch

Okay. And then the D&A, Hilliard, you mentioned that it obviously increased because of your higher asset base, but it looked like D&A outpaced your book value growth. Is that because of the mix or is there something that’s driving that faster and should that kind of come back in line?

Hilliard Terry

Well I mean in my eyes, we had roughly about 56% increase in D&A expense and the book value of the assets were up 53% so that was pretty much in line. The only thing that I would add to that is that obviously as we buy more expensive containers you’ll have higher depreciation expense.

Ken Hoexter – Bank of America Merrill Lynch

Okay. And then I am sorry, as you buy more which containers?

Hilliard Terry

If you look at – the containers we’re buying today versus several years ago, depreciated expense would be higher.

Ken Hoexter – Bank of America Merrill Lynch

It’s more expensive asset?

Hilliard Terry

Correct.

Ken Hoexter – Bank of America Merrill Lynch

Okay. And then you mentioned the direct container expenses also increased, that was due to the storage costs, right?

Hilliard Terry

Correct.

Ken Hoexter – Bank of America Merrill Lynch

Okay.

Robert Pedersen

Ken, can we just get some clarification here because I am not sure if this was what you’re getting at. Are you implying that purchasing new containers and holding that factories lease to increased storage costs because if that’s what you’re implying that’s not the case, we don’t pay storage costs for new containers at the factories.

Ken Hoexter – Bank of America Merrill Lynch

No, Hilliard already mentioned that it was because I thought one of you mentioned that it was because when you buy the containers you’re buying them and then knowing you’re going to hold them for a little while until you put them back out on lease?

Robert Pedersen

We buy them and they remain at the factory, we don’t pay storage. The storage costs go up because as utilization goes down containers are turned to dapples around the world and we have to pay storage on those containers because if they are not on a lease, they are sitting on a dapple, that’s the reason why storage costs goes up and it’s not related to the acquisitions of new containers that maybe yet haven’t gone on lease.

Ken Hoexter – Bank of America Merrill Lynch

And you’re expecting a similar utilization so it shouldn’t change too much from these levels, right?

Robert Pedersen

Correct.

Hilliard Terry

Correct. The other thing is we do have a larger owned fleet so indirect storage costs are higher,. the larger of our own fleet as well.

Ken Hoexter – Bank of America Merrill Lynch

Okay. And then just to step back, I guess Phil looking at obviously lot of CapEx questions, and your target, so maybe a little bit of a different angle but how do you view I guess debt levels and turn over, how much more levered do you feel comfortable getting given the environment of the 70% moving towards lessors and increased manufacturing build, you know just to get an idea of how fast you feel comfortable growing that base?

Phil Brewer

I don’t see that, if you – I don’t see that our growth will in anyway be constrained by our ability to finance that growth. We are not highly levered at the moment. I think we’re less levered than any of our other public peers. We clearly have the financing lines in place and if we needed to, we believe we could put additional capacity in place. So I don’t see our – we have room to increase the leverage of the company. We have access to the financing and that will not be a factor in constraining the growth.

Ken Hoexter – Bank of America Merrill Lynch

Wonderful. Appreciate the time.

Hilliard Terry

Thank you.

Operator

Our next question comes from Sal Vitale from Stern Agee. Please go ahead.

Sal Vitale – Stern Agee

Good morning gentlemen.

Phil Brewer

Good morning Sal, how are you?

Sal Vitale – Stern Agee

Good, very good. Just a few housekeeping questions first, if I look at the G&A expense that crept up $0.5 million sequentially, how do we think about that in the next few quarters, should it stay at that $5.5 million or close to $6 million?

Robert Pedersen

I think that’s reasonable. It just depends some of the sort of professional services costs and things of that nature which really don’t change that much quarter-to-quarter. So it’s reasonable to think it will be around that level.

Sal Vitale – Stern Agee

Okay. And then you talked a little bit about what a new box – where are new box prices are, where are used box prices are currently for the 20-foot dry?

Phil Brewer

The used box prices over the course of the last year remains relatively stable until the very end of last year when they came down a little bit which frankly is not surprise, I mean we often see that happening. There is still a very attractive level. I mean they are not at the levels that we saw say year and a half ago when they were hitting all-time highs but we’re still seeing used box prices in 20-foot containers. For example being sold around the world in the $1,400 $1,500 range which on any sort of historical basis remains at very attractive levels.

Sal Vitale – Stern Agee

Okay. So if I think about the volume of containments that you’ll be selling at your fleet over the next year or so, do you expect that to be static or stable or relative to say 2012, I am just trying in the sense for where gains on sale [ph] could go?

Robert Pedersen

Well as utilization likely going to be lower this year on average, than it was last year, you can expect that we’ll sell a few more containers this year than we did last year.

Sal Vitale – Stern Agee

Okay. So your gains on sale could be relatively flat to possibly slightly up, right?

Robert Pedersen

Yes.

Sal Vitale – Stern Agee

Okay. And let me just back a beyond a little based on the numbers that you mentioned there earlier, so your expectation is for global container production of 2.7 million TEU in 2013 when you said that you expect lessors to account for over 70% of that. So if I’ll just use 70% of that 2.7 that’s about 1.9 million TEUs purchased by lessors, then if I just assume roughly $2,000 price per TEU on that, that’s about $4 billion of lessors spending on new containers. Then if I just use your current market share, just maintaining your current market share that implies roughly somewhere in the ballpark of $500 million to $600 million, actually closer to $600 million of spending on new containers, so spending by Textainer. Is that roughly right way to think about it just really high level?

Robert Pedersen

I would only caveat, I’d make it as we generally spend more than what our market share is. I also think that your dollar figure of $2,000 per TEU which I think you mentioned you used in your quick analysis is low, I mean container prices are clearly above that already, and we expect container prices to increase over the course of the year, similar to how they behaved in the last two years. But conceptually the way you’ve approached it I think is a fair way to approach it.

Sal Vitale – Stern Agee

Right, so if anything I am actually a little bit too low so anything your new container purchases could be closer to say $700 million based on that math, right?

Robert Pedersen

Yes, or frankly higher than that as well.

Sal Vitale – Stern Agee

Okay. And then a find out that we layer on just say a few hundred million dollars of combined purchases leasebacks and managed deals, you could easily approximate that $1 billion if not a little bit more to that?

Phil Brewer

Sal, we’re always looking for opportunities to grow this company and that certainly won’t change the course of this year. What you’re talking about is exactly the way we approach it, we will look at all those opportunities and we’re quite optimistic that this will be a very strong year for the industry. There is growth in our – I think we have to all step back a second and say look, the industry is growing. There has been a drag which has been the Asia Europe leg but even that is expected to be slightly better this year than last year. I was just reading something in fact this morning talking about the dramatic improvements in the Northwest trade and then some of the other trades for examples Asian Africa or Asian and the Middle East.

I think the outlook for this year is actually quite attractive and when you combine that with the observation that more containers are going to be produced and more purchased by the leasing companies, the outlook for this year is good and we expect to have a strong year in terms of CapEx.

Sal Vitale – Stern Agee

Okay, great. And then just one last question, what is the current market forecast for containerized trade growth? Is that roughly about 6% right now 6% to 7% in 2013?

Phil Brewer

I think it’s slightly less than that. You can find as many sources for that data as you’d like and as many different numbers in each source, but I think the range I’ve seen is in the range of 4% to 6%.

Sal Vitale – Stern Agee

4% to 6%, which is still well above assuming roughly 5% of the global fleet is so this year, 2.7 million TEUs produced implies roughly 3% to 4% growth in the fleet. So and still we have trade growing well above the fleet curve. So that should maintain utilization for 2013, correct, which is consistent with what you said?

Hilliard Terry

Right, I think that Robert made a point earlier on that’s really important to keep in mind and that is there is not an excess supply of containers in the world. There is not, and then combined that with the fact that we all have the large percentage of our fleets, in our case over 80% is term lease or finance leases, you’re not going to see dramatic change in utilization. There is not an excess supply, many of the containers are a locked up on leases (inaudible).

Sal Vitale – Stern Agee

Right. And I think we’re on the same page, just one last question, you probably don’t disclose when you said yields weakened a little bit on new container purchases, you probably can’t disclose what the absolute level is. In terms of basis point decline versus say last year versus 12 months ago, can you give any color on the magnitude of how would they come down?

Phil Brewer

Yes, we’ve discussed that question many times in the past. And our response has been that yields are down in the low double digit range in a cash on cash basis. And that’s where yields have been in that neighborhood. We’re trying to be very selective and find those opportunities where we think we can get a slightly better yield and we’re also quite optimistic that you’re going to see a stronger market in any event as we come later in the year.

Sal Vitale – Stern Agee

Okay. Thank you very much for your time.

Hilliard Terry

Thank you.

Operator

Our next question comes from Bill Carcache from Nomura Securities. Please go ahead.

Bill Carcache – Nomura Securities

Thank you, good morning. First, so I have a, I guess a big picture question for your on your capital return policy, can you talk about how you and the Board think about potentially including some element or component of buybacks in capital return and I know there is a lot of focus on the dividend and that’s the consistency of the overtime I think has been obviously very good and very much appreciated by investors but no wonder looking at your stock chart here at all-time highs and clearly in retrospect it would have been very accretive to at least had some buybacks not just to earnings to but to real fundamental to investors. Is it really just a function of the flow – the fact that relatively smaller portion of the company is not public and so therefore you wouldn’t want to reduce the share count or is there something else at play, can you just give some general thoughts on that?

Phil Brewer

You know Bill, all the senior management here it spends quite a bit of time talking with investors around the world, the U.S., Europe, and Asia. And I have not heard much of a desire when we speak to our investors that we pursue a share buyback strategy. We recently issued additional equity. I think it would be odd to start buying back equity after we recently issued it. We view that issuance that we just did has been quite successful, certainly the shares have traded up and our liquidity in our shares has increased dramatically that was the point that many investors did range with us when we met with them.

And one of the things not since we just to provide funding for the company but to increase the liquidity was a goal that we had with that issuance so we believe we’ve achieved those goals. So a buyback strategy is not something we really are considering at the moment.

Bill Carcache – Nomura Securities

Okay, that’s interesting. Okay, I appreciate that color. And then also finally can you guys give me maybe or could you talk a little bit about the I guess just the nature of the bargain purchase gain, I guess from what you said you acquired assets in less in fair value and normally I think about a bargain purchase gain of something that you would see kind of in more of a distressed scenario, was that the case here, I am sense for why a seller would sell to you at less than fair value, I know you guys have a relationship with them but now just was it a competitive process maybe or any color around that would be great?

Hilliard Terry

Sure, I’ll give you a view back towards here and Phil will add more color. The bottom line is you should be just like any other managed fleet that we’ve purchased. The difference here is that we’re buying a company and when you buy a company you basically need to instead of assets you have to use sort of business combination accounting. And as such you have to fair value the assets in this particular case, the assets that we – the fair value of the assets were greater than basically the purchase price that we paid for the assets. And so this is something that’s real, these are assets that we believe the returns are going to be outperform investments in new containers. And it was the bottom line of a very good deal for the company.

Phil Brewer

I would just add to what Hilliard said, we had – so when we had a relationship with we already managing the assets. They could not sell the assets directly as Hilliard mentioned but it needed to be done in terms of purchasing shares in the company. And as a result of all these needs, while we were able to obtain what was frankly a very attractive price for the assets.

Bill Carcache – Nomura Securities

And so just to be clear, it wasn’t a really a competitive process where there were other buyers, it was essentially – there were no other buyers, potential buyers involved?

Phil Brewer

No, honestly that’s not the case. They could have done the transactions with others as well and they did speak to others. But in this particular instance we had – there were things we could do being the current manager of the containers and handling the transactions and perhaps another buyer wouldn’t have been able to do. And as a result we were able to negotiate a transaction and let’s be clear, I believe it was win-win. Not by any means trying to apply that the sellers were disadvantaged, I think they are quite happy with the transaction as well.

Bill Carcache – Nomura Securities

Okay, thanks very much guys.

Phil Brewer

Thank you.

Operator

Our next question comes from Doug Mewhirter from SunTrust Robinson Humphrey. Please go ahead.

Doug Mewhirter – SunTrust Robinson Humphrey

Hi good morning, Just about all my questions have been answered. I just had one question regarding the production forecast. So that 2.7 million TEU forecast I assume that you built that up from a more top-down look from forecasting (inaudible) third-parties and not from maybe conversations with the manufactures where you are looking at their – how many shifts they are planning or that sort of things, so it’s more of the top-down economically driven forecast than what you’re actually seeing, is that correct?

Phil Brewer

That number is really based on discussions we have, when we meet with our customers they would meet with the manufacturers. I am not sure if you are implying that we’ve done a deep analysis starting at this, that’s not the case but we feel that this year there will be more containers produced than were produced last year based on – frankly based on pretty – this is the fact they were open on the market meeting with the market participants.

Doug Mewhirter – SunTrust Robinson Humphrey

Okay, thanks. It’s very helpful. It’s exactly the kind of answer I was look for. That’s all my questions.

Phil Brewer

Thank you, Doug.

Operator

Our next question comes from Daniel Furtado from Jefferies. Please go ahead.

Daniel Furtado – Jefferies

Good morning everybody, thank you for the opportunity. I just had one quick one and that is, are you seeing any new entrance from a competitive standpoint into this space?

Phil Brewer

Well there was a – there have been one or two companies that have started up operations and entered the container leasing business. We haven’t seen them as strong competitors as of yet, but we have seen that happen, yes.

Daniel Furtado – Jefferies

Okay, that was really my only question. Thank you. Take care, everybody.

Phil Brewer

Thank you very much.

Operator

Our next question comes from Brian Hogan from William Blair. Please go ahead.

Brian Hogan – William Blair

Thanks. Direct finance leases on the balance sheet had some significant growth, was that partially due to the acquisition or is that customer-driven or is there any strategy shift on a direct finance leases?

Phil Brewer

It was really due to the fact that we had a lot of opportunities to do finance lease business last year, especially towards the end of last year. I know we announced in 2011, that we entered into a new joint venture to do finance leasing business. And it took a while for frankly for us to get traction with that joint venture but we really last year started to gain that attraction and we’re able to do several deals for us in the last year. We’re quite optimistic about further growth in that part of our business over the course of 2013.

Brian Hogan – William Blair

All right, thanks and then kind of bigger picture with you guys, you have lot of investment opportunities in your existing business whether it’s the – from the managed fleet or new containers or purchased leaseback transactions, have you spend any time looking at any other asset classes, rail or whatever have you?

Phil Brewer

We think the opportunities for growth within our own industry at the moment are actually very attractive and we know our industry, we know it very well. We believe we proven that we can continue to grow in this industry that we know. As far the time being that’s really where we’re focused.

Brian Hogan – William Blair

And then one last one, several years ago there has been a lot of private equity activity in the container leasing space, how have those players been acting, are they still (inaudible) any comment there would be helpful? Thank you.

Phil Brewer

Well there has been private equity activity in the industry. There is companies going public, companies that are public going back private. Let’s be honest we’ve got a lot of players in our industry and many of us are looking to grow our businesses. So our feeling is people are doing what makes – what is attractive from their competitive point of view.

We don’t see people behaving enormously irrationally but we are aware that in our industry every once a while you will hear somebody comment about one or another player, that happens in any industry. We think we’ve got a lot that we’ve got several strong competitors in our industry who are looking to grow their business.

Brian Hogan – William Blair

Thank you.

Phil Brewer

Thank you.

Operator

We have no further questions at this time. Mr. Terry, do you have any closing remarks.

Hilliard Terry

Well I just wanted to again say thanks for your attention. We look forward to seeing many of you at upcoming conferences and investor meetings throughout the quarter. Thanks for listening in.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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