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Seaspan Corporation (NYSE:SSW)

Q3 2013 Earnings Conference Call

October 31, 2013 10:00 AM ET

Executives

Sai Chu - Chief Financial Officer

Gerry Wang - Chief Executive Officer

Analysts

Keith Mori - Barclays

Urs Dur - Clarkson Capital Markets

Justin Yagerman - Deutsche Bank

Ben Nolan - Stifel

Michael Webber - Wells Fargo Securities

Anthony Sibilia - Credit Suisse

Operator

Welcome to the Seaspan Corporation Conference Call to discuss the Financial Results for the Three and Nine Months Ended September 30, 2013. Hosting the call today is Gerry Wang, Chief Executive Officer, Co-Chairman, and Co-Founder of Seaspan Corporation and Sai Chu, Chief Financial Officer of Seaspan Corporation.

Mr. Wang and Mr. Chu will be making some introductory comments and then we will open the call for questions.

I will now turn the call over to Sai Chu.

Sai Chu

Thank you, operator. Good morning, everyone, and thank you for joining us today. Before we begin, please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained third quarter 2013 earnings release and earnings webcast presentation slides available on our website www.seaspancorp.com, as well as in our annual report on Form 20-F for the year ended December 31, 2012 filed with the SEC.

I would like also to remind you that during this call, we will discuss certain non-GAAP financial measures including adjusted EBITDA, cash available for distribution to class A common shareholders, normalized net earnings, normalized earnings per share, and normalized earnings per share converted. In regards to such financial measures and for reconciliation of such measures to the most closely comparable U.S. GAAP measures, please refer to our earnings release.

I will now turn the call over to Gerry, who will discuss our third quarter highlights as well as some more recent developments.

Gerry Wang

Thanks Sai. Please turn to slide three of the webcast presentation. For Q3 we continued to execute on our strategy and deliver good results. First, our operating fleet performed well during quarter. Second, we expanded our managed fleet to 104 vessels by finalizing a significant newbuild transaction with the Yang Ming Lines by exercising options for large fuel efficient containerships with YSJ. Third we accepted the delivery of a containership charter to MOL growing our operating fleet and near-term cash flows. Finally, we continue to return capital to shareholders in the form of dividends.

I will now review our results for second quarter in more detail. Seaspan’s operating fleet achieved 98.5% utilization and continued to generate producible and stable cash flows from its long term time charters. During Q3, we continued to execute on our growth strategy through two significant transactions with Yang Ming for ten 14000 TEU few efficient server design containerships to be constructed at HHI and the CSBC schedule for delivery in 2005 and 2016. Five of these vessels will be retained by Seaspan. And executing options for the construction of five, 10, 20 a fuel efficient server design containerships at YSJ. Consistent with our strategy, we expect to sign long term time charters for these vessels with one of the land measures shortly. The allocation of those vessels between Seaspan and GCI is to be determined as per the ROFR.

In order to further capitalize for lenders demand for large modern containerships will be actively pursuing additional attractive growth opportunities and growing our fleet and consecutive revenue stream. We will report the transactions as soon as they are closed. We took delivery of the second for 4600 TEU vessels on three years fixed charter to MOL at the beginning of July to reach our current operating fleet of 71 vessels.

Before turning the call over to Sai, I note that only one vessel is currently off-charted and we have secured term charter for one of the other vessels for up to 20 months charter which is actually 22 to 30 months charter with additional option period for eight to 12 month to commence during November 2013.

As a result of our rechartering efforts during the quarter, only one vessel in our fleet is up for recharter for the year 2013 and ‘14 representing approximately 0.5% of our forecast 2014 revenue.

Sai will discuss our quarterly financial results. Sai, please.

Sai Chu

Thanks, Gerry. Please turn to slide four. Revenues increased by $2.5 million or 1.4% in Q3, primarily due to the TEU 4600s chartered to MOLs delivered in June and July and for management fees partially offset by lower rates from five vessels on short term charters during the quarter.

Utilization was 98.5% during the quarter, compared to 98.9% due to 29 days of scheduled dry docks with three of our vessels and 66 days of unscheduled off-hire compared to the 12 days of dry-docking days and 56 days of scheduled off-hire Q3, 2012.

Ship operating expenses increased by $1.1 million or 3% for the quarter. These increases were related to an increase in both ownership and management days for TEU 4600s on charter MOL and vessels managed for MOL as well as an increase in crew wages.

General and administrative expenses increased $2.2 million or 39.1% and by $9.3 million or 51.3% for the quarter and nine months. Increases in G&A are primarily for non-cash stock appreciation rates or SARs, granted to our CEO in December 2012 and certain members of management in March 2013. Total SARs expense was $1.7 million and $9.6 million for the three months and nine months respectively.

Adjusted EBITDA increased by 1.1% to a $131.4 million and by 0.2% to $381 million for the three and nine months respectively compared to last year. Cash available for distribution to common shareholders increased by 3.7%, $72.4 million and decreased by 2.4% to $206.4 million for the three and nine months respectively.

For Q3, increases in both adjusted EBITDA and cash available for distribution to common shareholders or due to an increase in cash flow from our expand fleet partially offset by increases in ship OpEx the increase in off-hire days and reduce revenues from vessels operating in a short-term charter market. Normalized EPS for Q3 was $0.28 compared to $0.30. The increase in normalized net earnings was offset by an increase in dividends for our preferred D Shares. In addition our share account increased by 4.1 million shares.

In terms of dividend policy our Board declared a Q3 dividend of $0.3125 per common share or an annualized dividend of $1.25. We feel that this is a sustainable dividend level that balances returns to shareholders, while maintaining financial flexibility and allowing us to invest in the attractive current newbuilds ordering environment. Our Board also declared and paid quarterly dividends for the three months ended October 29th and our 9.5% Series C and 7.95% Series D preferreds.

Please turn to slide five for our balance sheet information as of the quarter end and the end of last year. Our cash was $250 million at Q3, a reduction of $168 million due to the $180 million investments in newbuilds. Total liabilities declined by $149 million or 3.4%, a $133 million of that was due to a reduction in the non-cash fair value of financial instruments with the remainder primarily comprised of scheduled debt amortization.

On the capital structure side, on October 7th we announced a concurrent offering of common convertible notes. This was an opportunistic rates, general corporate purposes and for future accretive growth opportunities available to Seaspan in the current market. Our Board decided to focus at the offering as the terms presented were not in shareholders’ best interest. As we've done in the past, we intend to be opportunistic in our approach to accessing the capital markets as we seek to diversify our capital structure and support our growth plans.

During Q3, our Board authorized repurchase of up to 25 million of our Series C preferred at an open market repurchase plan which expires in July of 2014. During the quarter, we purchased 320,000 in of our Series C preferred for $8.6 million. The repurchase was part of an ongoing active management of our capital structure. We continue to successfully finance our growth and then finalize senior bank financing for three of our 18 bills to Yang Ming and three of our newbuilds to [Hampden]. We’re currently evaluating terms sheets 10,000 TEUs with MOL for 2014 delivery. And there continues to be a very strong demand from commercial banks to fund our new projects.

We are in very well discussions with our banks and capital providers regarding our (inaudible) and Eco program scheduled to deliver in 2015 and ‘16, which we’ll receive to fund on attractive terms.

Please refer to slide six now, for our latest forward guidance. We will have five year bills delivering in 2014, with three of them in the first half. It’s expected that these five vessels will generate $35 million in revenue and $75 million versus 2015 and a corresponding increases to our EBITDA and [suitable] cash flows.

We expect to recognize non-cash compensation of approximately $1.7 million for Q4 this year and $4.1 million for 2014 for the non-cash FARs. Approximately $3 million of the expected 2014 FARs expense will be recognized in the first half of 2014. We believe these rights provide for alignment of interest with our shareholder with long-term expenses tied to higher common stock price. Each of these items remained subject adjustment.

I would like now to return the call back over to Gerry.

Gerry Wang

Thanks, Sai. Please turn to slide seven where I will briefly discuss the industry’s fundamentals. Consistent with our comments made last quarter, there has not been a material change in market fundamentals. On the supply side, we expect tonnage growth of about 6% to 7% for the year 2013. Major operators continue to manage supply through widespread slow steaming and incremental idling of ships. The order book remains at a manageable level of approximately 21% of effective loading capacity or by 7% per annum on average. It is expected that this amount will be further reduced by demolitions potential order consolidations and conversions.

On the demand side, we expect global containership volume to grow by around 4% in 2013 as per various forecasts. The freight rate environment remains volatile from trade land to ship land and the charter rates for short-term charters have been weak and volatile during the first nine months of 2013. The strong demand that we are seeing from our [liner] customers for large Eco cloud ships is entirely driven by desire for cost reduction rather than a desire for growth in market share. Since banker costs account for 35% to 40% of an operator’s operating cost modernizing their fleet with larger modern fuel efficient vessels such as the ships been built under Seaspan’s SAVER design has become our top priority. At the same time, we understand the balance sheet of our customer is still not as strong as they would like, which we would anticipate will make ship outsourcing a larger part of their fleet modernization goals.

We believe the industry situation fits well with Seaspan’s strength and ability to capitalize on growth opportunities. Seaspan’s competiveness is defined by our financial strength and the deep technical and operational expertise building and operating large modern containerships.

We have a strong base of cash flows, which will grow through entering long-term charters as our customers modernize their fleets to reduce their operating costs. We are clearly capturing a significant part of the market versus and believe this will translate to long-term shareholders value.

Please turn to slide 8. This slide depicts risk target maturity profile of our charter portfolio. The average remaining charter length of our operating fleet is approximately six years. Three of our vessels that were previously trading in the spot market have been fixed for 22 to 30 months. We now have only one vessel that is up for recharter for the year 2013 and also 2014.

In addition we will be able to secure a significant amount of new good growth during Q3 and additional 10 vessels to be chartered to Yang Ming, of which 6 (inaudible) and additional five new good vessels to be constructed at the (inaudible) which remains subject to ROFR with GCI.

Please turn to slide 9, where I will reiterate our vision for the future. We believe Seaspan is well positioned to continue to both enhance its leadership position and to create shareholder value over the long-term. We’ll continue to pursue fleet growth with the controlled and balanced approach, being patient and disciplined and using our financial strength and technical and operational leadership position to capitalize on opportunities that meet our strict criteria. Our core focus will remain on designing only and chartering large modern efficient containerships to creditworthy customers.

As a ship leasing franchise, we consider it to be critical to consistently maintain a strong balance sheet, diversifying and enhancing our capital structure including maintaining appropriate leverage will remain one of our top priorities. Our results may be muted in the next few years as we continue to invest in new vessels for future. However on strong base and cash flows from existing charters, as well as efficient growth will enable our franchise to be strong for the long-term value of our shareholders.

We have a history of returning capital to our shareholders. And we will remain committed to sustainably increasing our common share dividends over the long-term as we continue to optimistically grow our business.

Now we would like to open the call for questions. Operator, please begin.

Question-and-Answer Session

Operator

(Operator Instruction). Our first question comes from the line of Brandon Oglenski from Barclays, your question please.

Keith Mori - Barclays

Hi. Good morning. This is Keith Mori on for Brandon.

Sai Chu

Hi, Keith.

Keith Mori - Barclays

Just wanted to touch on you guys are aggressively growing the order book here at Seaspan GCI, I am just curious as to, you’re not the only one doing that, you see some of your peers as well. What is your concern surrounding the supply growth in next year or the year after that could impact charter rate recovery?

Gerry Wang

All right, good question Keith. The vessels we books on are large fuel efficient vessels as far as supply is concerned the line of measures fixing on more than our fleet in terms of trying to increase the market share which means a lot of older vessels in vintage of 25, 35 years old will go to the termination. So you will see an accelerated scrap activities for a lot of older vessels as a result of managing supply. As you've heard, we’ve been told by the CEOs of the leading land measures I think they would present the chain to balance the supply. As far as our situation is concerned, Seaspan is well situated with our financial strength and also our technical and personnel expertise.

Keith Mori - Barclays

I guess sticking with supply for at the moment here, you see an increase in a larger ship sizes and some of the speculative ordering with no charges attached is becoming a little bit more frequent. Does this give you any level of concern as well regarding maybe the supply growth in a larger ship sizes is going too fast and maybe could impact future values?

Gerry Wang

We have not seen that and we have noticed quite a few 9,000 TEUs other than speculations, Seaspan focuses on 10,000 TEUs or larger. The 10,000 TEUs, the 14,000 TEUs, the 18,000 TEUs, so all demand come from the direct requirement of our partners and our charters to pursue their fleet modernization program. As I said, we are well positioned and we work on dues, and we’re confident we’ll be able to capitalize on those opportunities and we will continue to pursue long-term charters, which would have no short-term and medium-term impacts.

Keith Mori - Barclays

Okay. I’ll pass it along. Thank you for the time.

Operator

Our next question comes from the line of Urs Dur from Clarkson Capital Markets.

Urs Dur - Clarkson Capital Markets

It’s really mostly market questions and maybe if might see give me a call offline, because I was a little bit off on the share count probably because of the (inaudible) that I maybe screwed up. But what's your view, obviously you are sticking to these larger ship sizes, longer-term contracts really a leasing model, but I guess, I would like to learn a little bit about what your view on the smaller size of the market and would there ever be any space for that to be revisited by spend on a longer-term basis, there is nothing on order in that space and it looks like it may recover over the next couple of years. I was wondering what your thoughts would be there?

Gerry Wang

Yeah, Urs, you are 100% right Seaspan foreseen strict leasing model. At this point in time we want to focus on larger ships that’s where the demand is from the land measures their pursuit of modernize fleet as well finalize finish the larger vessel program. I would expect some cascade activities towards medium and smaller sizes. Seaspan always maintains close dialogues with our partners, with or potential customers in helping them pursue what they want they want in terms of their fleet modernization programs. And I think in the near future we will able to fully give you a little bit more color as to what will be the next in terms of medium sizes and small sizes. At this point in time top priority for those leading land measures is to cover the large vessel requirements for the main chase, i.e., Asia-Europe and Asia-North America.

Urs Dur - Clarkson Capital Markets

Yeah that’s very clear. So I appreciate that very much guys. In regard to your charter coverage that’s big, you say you want to steadily increase the dividend. Are there any expectations or is this just simply open to review by the Board or should we be expecting of something say at first quarter results next year?

Gerry Wang

I will ask Sai Chu to answer the question.

Urs Dur - Clarkson Capital Markets

I know you can’t say much, but I figured I would try.

Sai Chu

No, good try, good question. I think that the fact is we establishers, we do look at it on an annual basis the dividend increase. However, if there are circumstances where we feel there is a great opportunity for value as we had with the instance on tender offers and there is other forms of giving capital to shareholders. So based on the business today, with the very stable cash flows in the addition of the new ships next year and overall goal of driving value to shareholders and recognition of the dividend, over to that again annually at our Q4, and we understand what that’s important to shareholders and that can be considered along with other opportunities for the business. So I can’t give you affirm answer but we have recognized the desire for increase of the dividend and we will report back in Q4.

Gerry Wang

Urs so maybe I just want to add a little bit more color, the policy of progressive in our dividends would stay.

Urs Dur - Clarkson Capital Markets

That is important, thank you. And then finally as Gerry and both of you whatever, I ask for the smaller ship market but what have you guys I noted again there is a long-term leasing model but clearly there is a real demand on the base sizes of ships to replace on the efficiencies and all of that. What are the actual throughputs that you guys have been seen in your report? Have they been improving? Has there been any hint of improvement Asia to Europe? What is your outlook economically and for the container space itself?

Gerry Wang

We would expect the year 2014 to be fairly moderate and the freight rates will not be as volatile as before given the new alliance of [P3] come into play and the land measures also have learned from the lessons. I think the extreme ups and downs probably would be less extreme. So the window within which the fair rates will be moving, will be narrow, therefore you will see more moderate performance to the bottom line of the land measures income statements.

Urs Dur - Clarkson Capital Markets

Okay, fair enough. That's very helpful. Thanks for all your time guys.

Operator

Our next question comes from the line of Justin Yagerman from Deutsche Bank. Your question please.

Justin Yagerman - Deutsche Bank

Looking at the results in the quarter, the upside was impressive, I'm assuming the revenue was due to the kind of differential on timing on ship delivery, but it looked like you guys head about $0.04 model better operating expense. Just curious what's going on there if you guys have had any initiatives to get leaner on the operational basis and if that’s been showing through in the operating results here?

Sai Chu

Yeah. The operations are actually getting more efficient partially because as a result of the newbuild programs. We're able to achieve better costing for the spares and maintenance requirements because what we do is we're using newbuild programs to leverage against our supplies. Basically you say if you want to come on board to become a supplier you got to give cheaper and better spares. So that’s just to give you a little color as to what we're trying to do and also through economy of scale with the newbuild programs fleets larger. So we're able to take advantage of that in a cost control in a purchases and generally speaking as a fleet grows as a (inaudible) continue to grow we’ll be able to see better economics as predicted frankly.

Justin Yagerman - Deutsche Bank

Yeah I know and it definitely showed up as this quarter shy, how should we be thinking about that in terms of flowing through in the model on a per ship basis or where can we quantify that so that we can catch up with your efficiencies going forward?

Gerry Wang

Well, I think as you know this required the manager, our operating expenses are not necessarily going to be stable, right. So at some quarter we're going to do better and others we have a long-term target. So I think if you just take the averaging out, that’s probably the best approach. I mean we've done historically better than everyone else on the cost per ship basis because of the age of the fleet and the fact that we've managed the build process and are able to achieve better pricing with our suppliers. So I think it’s tough to quantify, but I would say that you just have to take averaging out. Next quarter is likely to be a bit higher on OpEx quite frankly just because it’s a seasonal and we tend to have more maintenance in Q4.

Justin Yagerman - Deutsche Bank

Okay. That’s helpful. Thinking about where we are right now from an asset value same point I mean obviously you guys have been able to buy a bunch of ships towards the lower end of recent memory on asset prices. Where are we and where our rates on a relative basis for long-term contracts at least in your view and what we think about the market?

Gerry Wang

The newbuild prices are firmer as a result the long-term charter rates for larger vessels also getting firmer, that's a where the Chinese.

Justin Yagerman - Deutsche Bank

Are we above 9,000 TEU right now?

Gerry Wang

Yes, 9,000 TEU, 10,000 TEU, 14,000 of course what probably even though it is reason for the moving prices for the dry dockers and tankers moving up which result is ship builders putting pressure on the prices for the containerships.

Justin Yagerman - Deutsche Bank

Not size, but on the cost per TEU basis, where are we roughly in that spectrum of what you guys have paid in the last couple of years?

Gerry Wang

The ship prices for the 10,000 TEUs have gone up approximately about 10% from the historical low that was experienced at the beginning of the year and at the end of last year.

Justin Yagerman - Deutsche Bank

Okay. And if rates move commensurate?

Gerry Wang

The long-term charter rates will move pretty much in line, more or less.

Justin Yagerman - Deutsche Bank

Okay. And can you give us some details around charter rates for the Hamburg and the Madinah and how you are thinking about the Madinah in terms of the duration on trying to get that vessel charter here?

Gerry Wang

We’re working, that's the only vessel in the spot market, probably we’ll get something around $7,000, $8,000, $9,000 per day in the short term and just where the market is. And we just continue to advance. As we say we only have one vessel in the spot market for the year 2013 and 2014 as well. So naturally, this is not the focus but that’s where the market is. Larger vessel the 8,000 TEU, I wish to have today actually having very stronger charter rates, but we don’t have any until 2016. So that where the market is. So there is sort of larger vessels and stronger demand and small vessel and big demand.

Justin Yagerman - Deutsche Bank

Okay. Last question where are we from a yard slide standpoint in terms of availability and if you were to place orders today when would you expect delivery?

Gerry Wang

That would be a 2016. There are very few slots for 2015, probably towards the very end of the year, couple of alt ones but generally speaking we’re focusing our 2016 deliveries for the new transactions we are working on.

Justin Yagerman - Deutsche Bank

Okay. Thanks so much for the time.

Operator

Our next question comes from the line of Ben Nolan from Stifel. Your question please.

Ben Nolan - Stifel

I really just had two questions. Number one is on the refinancing, you guys have some deck coming due in 2014, 2015 and I know in the past you have talked about being in the process of working out new terms on some of those deals, just curious where that process stands?

Sai Chu

Ben, it’s Sai. We discussed it in the past, the chunk of that is already refinanced through an existing facility of $340 million. We have excellent support from our existing bank group. We've made excellent progress and I can’t report on something today, but I think in the near-term, we will have a good financing completed for facility. It's not due until May ‘15, but we're pleased that we will have something completed.

Ben Nolan - Stifel

And then the other question is more market related, and Gerry you brought up the P3 Alliance. I mean I am just curious how you think ultimately that, well, first of all, if you think, if you make a big difference in the market, and if so, what type of difference are the operators going to be a little bit more efficient in putting containers on vessels or is it a non-event?

Gerry Wang

I think the advantages will be primarily from two areas. One is there will be more and a better coordination amongst around the measures in terms of supply, seasonal adjustment through investors and laying out the (inaudible) and older vessels due to graveyards. I just read a report yesterday that you know at this point in time, because measures they were to control the supply side by 7% to 8% just through idling and a slow steaming adjustment. On top of that, I’ve been told by the CEOs of our majors, substantial number of older vessels, over 25, 30, 35 years old are being sent to you for demolitions. So you see better coordination in that regard on the supply side, which has direct impact on the fair rates.

And the other benefit I see would be a better coordination in terms of not on the cuttings (inaudible) in terms of price savings just like your airline business, they are working together to deliver more vessels you still buy cargo on the cutting rates are due that vice versa that kind of the things.

So I expect the fair rates to be still volatile, still demand and supply driven, but more sort of a narrow window with less volatility on the extreme ups and downs. And as I said earlier during the call, this would result in more stability for the bottom lines of the liner majors creating some stability for us. But as far as we are concerned, our business of the long-term service, our demand comes from the modernization programs implemented by the liner major reduced the per TEU cost that for trend as (inaudible) and we'll take advantage of that. And then there will be cascade impact down to the older vessels and small vessels. But at this point of time, our focus is working with our liner majors and pursuing that fleet modernization and that we feel very fortunate with our financial strength and technical operational expertise. We are included in those active discussions and we're working on transactions. We are confident that we'll be able to report the conclusions of the transactions shortly before they are done where we can only say that much, but we're quite pleased with the progress we're making. And what position that is present in long-term leasing franchise model that’s where we wanted to be in and that’s what we're doing right now.

Ben Nolan - Stifel

Okay. And I know I said two, but I have one more quick on, could you maybe talk I know in [Jeff’s] question you mentioned about that where rates are with respect to long-term charters. Has there been any change in the tenure of what’s available, I mean are there still ample 10, 12, 15 year charters or majors, liner majors looking to go a little shorter?

Gerry Wang

No, that part has insurance and the liner majors measure still go for long-term charters as alternative outsourcing as part of the capital requirement.

Ben Nolan - Stifel

Okay, perfect. That’s a nice quarter. Thanks.

Operator

Our next question comes from the line of [Sean Collins] from Bank of America. Your question please.

Unidentified Analyst

I know you touched upon newbuild prices briefly. Can you just talk about kind of the differential you’re seeing between regular newbuild and then eco ship newbuilds and what kind of greater price you’re seeing there and then also comment on I think greater demand you’re seeing from your customers for eco ships versus non-eco ships?

Gerry Wang

As far as containerships are concerned, on the large ship side this all eco driven presented by Seaspan’s several design. I just want to mention to you this movement I was pioneered and initiate by Seaspan’s drive to modernize the design in code name of SAVER (inaudible) of vessel and its reduction. There has been wide accepted by all the liner measures and by all ship builders. It is as coupled with gen and nobody is building the regular ships anymore, it’s all about the eco design.

Unidentified Analyst

And then can you just talk about your liquidity situation and kind of how you think about that going forward especially given the deal that you past on and how you would think about your options in the future around that?

Gerry Wang

Sorry we haven’t got the liquidity part of the question.

Gerry Wang

Thanks. Yes, we have the $250 million of cash and cash equivalenc and short-term investments that are available to us. We also have our remaining capacity in our debt facilities and we’re working on net debt facilities that are available to us. So we have a lot of options. We had many different points of capital rates available to us.

So that raise was opportunistic like always you launch transaction, you have a range of choices and it doesn’t make sense you don’t do it, and we’ll fortunate that we can raise of the up firms of capitals when we want to.

Unidentified Analyst

Okay that's great. Yhanks for the time and insight guys.

Gerry Wang

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Michael Webber from Wells Fargo, your question please.

Michael Webber – Wells Fargo Securities

Good morning, guys. How are you?

Gerry Wang

Hi Michael.

Sai Chu

Hi Mike.

Michael Webber – Wells Fargo Securities

Hey guys so I just wanted to piggybank on the last question around the deal that got pulled during the quarter and the answer certainly makes sense, I am just curious as to how you guys think about re-approaching that market eventually for equity and does it place more owners in the near-term or around the [freight] market where you guys altogether have a pretty big established presence that seems to be wider open?

Sai Chu

Yeah. I think the first point is the deal was available to us we could have gotten the deal done we just hope that the pricing range didn’t make sense for our shareholders. So I think that’s the first point. The second point we have access obviously to the preferred market where we’re well established, investors have done well owning our preferred and we feel it’s a very fair cost of capital given our capital structure. And at some point we may chose to access that market, there are other forms of capital available to us on the public market that we have not entered into yet, but we may do so.

The [charter] market is again available to us, but we think that it’s important to do transactions that are good for long-term value and at the right price point for our investors both current and future. I think the reality is that we’ve grown this business $3.5 billion in the last two years. We accessed about $425 million in the preferred market. And there are many points of access. And we see tremendous opportunities to grow the business. And we will be back for capital markets overtime, but we can’t obviously no issue telling you (inaudible).

Michael Webber – Wells Fargo Securities

Got you. That makes sense. One of the earlier questions, might have been on the first questions around supply. I guess both of them smaller and larger asset classes and I think one of the bigger risk points longer term is around kind of the obsolesces risk associated with some of the older assets, particularly Panamax and kind of up and kind of that mid-size. You guys have a number of those assets that have pretty lengthy kind of cash flows streams and that’s [none] of them do. I am just curious about how are you thinking about managing around that and we're already seeing two MLPs step into this space and acquire similar sized assets with long-term contract streams on them. Would that thing, that’s of these assets be viable for you guys or even feasible or is that off the table in terms of the way you think about kind of managing that risk and kind of managing your cash flows going forward?

Gerry Wang

Mike, our strategy will stay the same. We want to focus on new vessels, new designs of several designs large vessels with credit worthy customers through long-term charters. We believe there is enough growth opportunities there and we're actively working on China’s actions, I am making no secret about it. And hopefully, if new growth opportunities which we can turn into new business with growth are the issues for example, the excellence of legacy for the increases, we will be taking care of, the market is going through cycles all the time, it's always cyclical.

Our focus right now is really on growing our business working with line of measures for the larger vessels, utilizing our financial strength and also our technical operational expertise, nothing has changed and we remain very confident on our core growth trajectory.

Michael Webber – Wells Fargo Securities

Got you. And just to clarify, when you say the obsolesces risk will be taken care of, is that just, you are basically saying that you will just hold them until the cycle correct itself and….

Gerry Wang

Absolutely. There will be a lifting, I mean at the end of it, Mike, if we get into more a little bit more economic discussions, this discussion about the inflation trending up, the interest rate moving up, the cost of production also moving up assuming that as the global economy improves, the international changes improves, the containership situation improves, the asset values will move up. I think the reason we’ve seen the uplifting of the second hand values of the dry dockers which give the example where the value is versus 6 month ago 12 month ago for even though the vessels right. And then newbuild prices for the dry dockers for size and come up 30% and the second vessels have gone up to 30% as well.

So it's always cyclical, we're using that only to demonstrate the cyclical nature of the business. And unfortunately Seaspan’s model is built would never the fourth seller during down cycle, would buy during down cycle, and that’s the most important feature of our long-term leasing model. A long-term we’ve got (inaudible) and that’s what we will design for, that’s what that we’ll be pursuing and we’d like where we are today. We’d like our few spots back and especially with regards to the growth prospects and the mall we grow, the mall revenue we add, the more newer vessels we have and then you go through out swinging of the cycle along with the existing vessels you’ll be in better and better shape as time goes by.

Michael Webber – Wells Fargo Securities

Okay. That’s helpful. Just one more for me and it’s for Sai. You guys have I think there four assets around bareboats to MSC and I believe that rates get up now and into the back end of the quarter from 10k to 14k I believe this debt is so current. In terms of the bareboat rate adjustment side, does that actually get step up as we move to ‘14 or is that being kind of smooth out in terms of what you’re going to writing in terms of the bareboat adjustment quarter-over-quarter?

Sai Chu

Yeah. Let me get back to on that, I don’t have that information.

Michael Webber – Wells Fargo Securities

Okay. But those rates still on quarter to step up to 14k as we?

Sai Chu

Yeah. It is the step up in addition there is required option payment at the end by MSC.

Michael Webber – Wells Fargo Securities

Okay, all right.

Operator

Our next question comes from the line of Anthony Sibilia from Credit Suisse. Your question please.

Anthony Sibilia - Credit Suisse

I am calling in for Gregory Lewis. I just had a question. I personally excited that part of the revenue increase quarter-over-quarter was related to management revenue and I was wondering if you could potentially quantify that and then also give us some information on how we should think about that going forward specifically I guess the construction supervision revenue with all the newbuild order recently?

Sai Chu

Yeah, it’s primarily actually related to the 4600, which we managed on behalf of MOL prior to our acquisition. It was actually not that significant, but it did have marginally increase. So you won’t see that in the subsequent quarters. But we do also manage the ships for our joint venture with Carlyle. So it’s really a cost plus we get a certain daily rates for that.

Anthony Sibilia - Credit Suisse

And I mean it sense like you are getting between $550,000 to $650,000 for newbuild, is that recognized over the construction period?

Sai Chu

Yes.

Anthony Sibilia - Credit Suisse

Okay. All right. And so I mean that is we will start seeing that on the topline kind of going forward with obviously newbuild orders?

Gerry Wang

Yeah, the newbuild that we are ordering for our joint venture.

Anthony Sibilia - Credit Suisse

Okay, great. Thank you guys so much.

Operator

Thank you. This does conclude the question-and-answer session of today’s program. I would like to hand the program back to management for any further remarks.

Gerry Wang

Okay. Thank you very much. Once again, thanks a lot for your interest and time for this call and just like to please with the caller and we’re also very happy with where we are in terms of Seaspan’s growth prospects. And I just want to reiterate Seaspan’s policy of progressive dividend going forward and we are looking forward to talking to you for Q4 probably March next year and see you again in the meantime. Have a good Halloween and Christmas holidays, all those things. Thank you very much. Bye-bye.

Operator

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

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Source: Seaspan's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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