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Global Ship Lease, Inc. (NYSE:GSL)

Q1 2014 Earnings Conference Call

April 30, 2014 10:30 AM ET

Executives

Ian Webber - CEO

Susan Cook - CFO

Analysts

Omar Nokta from Global Hunter

Chris Snyder - Sidoti

Mark Suarez - Euro Pacific Capital

Zach Pancratz - DRZ

Operator

Good day, ladies and gentlemen and welcome to your Global Ship Lease Q1 2014 Earnings Conference Call. At this time, all participants will be in a listen-only mode. But later there will be a chance to ask questions and instructions will be given at that time. (Operator Instructions) And as a reminder, today’s conference is being recorded.

And I would like to turn it over to your host, Ian Webber.

Ian Webber

Thank you very much. Good morning everybody and thank you for joining us today. I bet you’ve been able to see the earnings release that we issued earlier on and been able to attract access as per slides that accompany this call.

The Slides 1 and 2 always remind you that the call may include forward-looking statements that are based on current expectations and assumptions and are by their very nature, inherently uncertain and outside the Company’s control. Actual results may differ materially from these forward-looking statements due to many factors, including those described in the Safe Harbor section of the slide presentation. We also draw your attention to the Risk Factors section in our Annual Report on the Form 20-F, which we filed last week, and which you can obtain through our website or through the SECs. All of our statements are qualified by these and other disclosures in our reports filed with the SEC. We do not undertake any duty to update forward-looking statements.

Finally, for reconciliations of the non-GAAP financial measures to which we will refer during this call, our reconciliations to the most directly comparable measures calculated and presented in accordance with GAAP, please refer to the earnings release that we issued this morning, which is also available at our website.

I’d like to start today’s call by reviewing the first quarter highlights, including our recent secured note offering and then provide an overview of our fleet. After that, I’ll offer some comments on the industry and our charter, CMA CGM and on growth opportunities that we’re currently evaluating. Following that, I’ll turn the call over to Susan for her commentary on our financials. Then after brief concluding remarks, we’ll open the call up for questions.

Slide 3 shows our highlights for the quarter. During the quarter we continue to generate strong cash flow with fleet utilization in excess of 99% for our 17 vessels, all of which were deployed on Time Charter contracts and which generated revenue of $34 million and adjusted EBITDA of $20.9 million in the quarter.

We also in the quarter increased our sizeable contracted revenue stream by extending four charters and finally completed our refinancing transaction which strengthened and transformed our capital structure and enhanced our growth prospects.

Looking at contracted cover, we increased our time contract cover by agreeing with CMA CGM to extend by three years, until late 2019. The Time Charter contract is on four of our eight geared 2200 TEU vessels, which contracts would otherwise have expired late 2016.

We appreciate CMA CGM support in these extensions and based on the new rate of $15,300 per day affective from February 1, 2014, we’ve added approximately $54 million to our contracted revenues, as well as increased our weighted average remaining contract coverage.

We consider these extensions to be a significant positive development for shareholders and representative of our strong relationship with CMA CGM. The extensions provide us with additional visibility on our future cash flows, while protecting us from volatility in Charter rates on eight of our -- sorry -- on four out of our eight 2200 geared units.

Also and most importantly during the quarter, we achieved a milestone for the Company by issuing $420 million of secured notes using the proceeds to eliminate our previous highly restrictive credit facility, thus providing the Company with a strong platform to proactively take control of the business and create long term shareholder value.

On Slide 4, we detail the benefits of the notes offering, which together with the associated $40 million revolving credit facility, we completed approximately six weeks ago. This was as you know the culmination of a process which we commenced last year as we judged that market conditions were supportive of such refinancing.

On the benefits, firstly we’ve significantly increased our financial flexibility by eliminating highly restrictive maintenance covenants embedded in the credit facility, including most importantly and most restrictively loan to value and also eliminating the requirement to use 100% of our free cash flow to amortize debt. Our cash flow can now be redirected to growth.

Secondly by achieving this flexibility and as I’ve just inferred, we positioned the company to take advantage of cyclically low asset values by capitalizing on accretive acquisitions and adding a growth component for the benefit of shareholders.

I've heard we’ve taken the first steps on the path to reinstating a dividend, which we intend to do at such the time as we can ensure that it will both meaningful and sustainable. Under the previous credit facility to remind you, we were simply unable to contemplate a dividend. And lastly by entering into the new $40 million revolver during a time where bank debt continues to be constrained, we’ve created additional investment capacity to pursue the attractive investment opportunities that we’re seeing in the market and that we’ll discuss in more detail later on in the call.

Slide 5 contrasts our old credit facility and the new notes. I’m not going to spend a great deal of time on this since we review this in mid-March -- on the March 18th on the call we held to discuss the notes offering but I’d like to draw your attention to a few crucial items.

In addition to gaining the flexibility to proactively pursue compelling growth opportunities, thereby increasing the Company’s cash flow, the new notes will result in decreased annual cash outlays relative to the old credit facility. Our cash outlays, including interest cost, debt amortization and the settlement of our interest rate derivatives, the swaps will decrease from around $92 million in 2013 to between $44 million and $64 million a year under the notes which includes cash interest on the bond as well as on our preferred shares as well as the commitment fee for the revolver. And the variation between $44 million and $64 million is the up to $20 million a year amortization of the notes based on participation by note holders once a year in a tender offer that we’re required to make after the proceeds of excess cash flow.

So a significant increase in free cash flow for us comparing last year’s debt service with this year’s debt service. In addition to removing restrictions associated with our old LTV covenants, the other maintenance covenants have gone as well. The offering also pushes back our refinancing risk from 2016, which was the final maturity date of the old credit facility after 2019 although it’s really important to note that we’ve got the ability to call the notes at our option as early as April 2016.

Moving to Slide 6, this summarizes our financial results since we commenced operations in the first quarter of 2008. The contrast between the time charter index, which is the red line running across the top of the slide and our results at the bottom that provide a clear illustration of both the rationale for our strategy of focusing on long term fixed rate time charters and our success in executing that strategy. So while the time charter index has fluctuated significantly in the period and in recent years has been at lows, we’ve shown a high degree of consistency throughout that time generating strong predictable cash flows and maintaining fleet utilization at or near 100%, certainly adjusting for scheduled dry dockings. The costs [ph] were volumes related from the volatility of the spot market, the changes that you do see in our results from quarter to quarter, primarily attributable to scheduled dry dockings, although in recent quarters, the effect of our two 41,000 TEU vessels are coming off their initial charters has also affected results. On dry docking for first quarter 2014, we have no dry docking and looking forward we have only two vessels scheduled to be dry docked for regulatory purposes between now and the end of 2015.

Turning to Slide 7, this shows our fleet and charter portfolio. The weighted average age of our fleet is approximately 10 years and also an economic life of 30 years. And based on our success and extending by three years the charter contracts on four that I gave you and it’s late 2019 as I’ve already mentioned, the weighted average remaining term of our time charter coverage increases to 7.6 years, up from 7.1 years. This is as at March 31, 2014. In addition, our contracted revenue stream increases or increased at $54 million [ph] to sum $932 million. The long term nature of our contracts provides us with a stable source of revenue for years to come and hence significant visibility on future cash flow.

Turning to the 4,100 TEU vessels, one of those vessels was redelivered to us on April 26, just a few days ago at the end of our charter. We’re probably in active discussions with the party other than CMA CGM for short term charter that would commence shortly at the current market rate. We currently expect the other 4,100 TEU vessel build [indiscernible] to be redelivered towards the end of May. As I mentioned on our last call back in February, the possible outcomes for her [ph] include re-chartering, lay-up if suitable employment cannot be found or disposed. We’re keeping all of these under review.

Outside of these two spot vessels, which actually accounts for less than 4% of our revenue in the first quarter, we remain well incubated from volatility in the market as we now have no charter expirations until late 2017.

On our last earnings call, I mentioned the one of the other geared vessels, the Julie Delmas had suffered damage to one of the cranes, one of the three cranes onboard. The vessel continues to operate effectively as a non-geared vessel, while we work to repair the damage. The urban [ph] part is currently being fabricated and we expect that the vessel will be fully operational in the third quarter and hopefully early in the third quarter. And at that time the charter rates will reverse to the old rates of $18,465 a day from the $10,000 a day which has been applicable since early February which recognizes the vessels impaired operating capability.

Moving onto Slide 8 we’ve provided an outline of our strategy going forward. Firstly, we intend to maintain strong charter coverage for our fleets with repeatable counterparties. Secondly, as we capitalize on attractive acquisition opportunities that exist in the current cyclically low asset value environment, we will seek to diversify our charter portfolio to include other major line or operators complementing our relationship with CMA CGM.

Thirdly, with our refinancing we’re in a strong position to take advantage of growth and our capital structure supports our growth strategy with an extended debt maturity profile, additional liquidity from the $40 million revolver and significantly enhanced strategic and financial flexibility under the new notes which allows us to add a growth element to our business.

With existing cash in hand and the orders seen at March 31st, our balance sheet includes $55 million of cash. So with that cash in hand and the new revolver, we’ve got over $70 million of dry powder immediately available, which we can put to use in making attractive acquisitions. In pursuing growth we would look to achieve a strong return for shareholders, including generating incremental cash flow, partnering with good counterparties and positioning the Company to benefit from any future increases in asset values and charter rates.

On returns, based on our analysis of relevant transactions that have been consummated in the last couple of years, we believe that charter attached or structured transactions such as say the leaseback transactions can generate unlevered returns in the double digits and teens, mid-teens and potentially higher. And there’s further potential upside contingent on the strength and timing of the eventual cyclical recovery.

Such structured charter attached transactions would also be immediately accretive to our cash flow. There are also opportunities as I’m sure to purchase distress tonnage where we could buy assets at a modest premium to scrap value but only on charter rates based on the current spot market. We would expect this type of transaction to generate a higher unlevered [indiscernible] in the medium term, but at the expense of low or even cash neutral yields in the near term. So little or no cash flow in the immediate future. As such, whilst we would certainly consider such distressed transactions if we felt the returns from doing so would ultimately be supportive of our growth strategy and accretive to our shareholders, our primary focus is on structured deals providing immediate incremental cash flow and EBITDA to our business.

Finally on this slide, we intend to take a disciplined approach to capital allocation. As I’ve said previously the refinancing has put us into a position to grow our business in such a way as to support the reinstatement of the dividend in due course. In pursuing this goal, we intend for the time being to seek out accretive acquisition opportunities to grow our cash flow and our earnings and expanding our capacity for dividend payment and establish a platform from which we can ensure that any dividend would be sustainable. And we certainly understand the importance of providing a sustainable dividend to our shareholders and continue to believe that executing on our growth strategy and making accretive acquisitions at a time of cyclically low asset values is the optimal course of action for supporting the eventual payment of a meaningful and sustainable dividend.

Turning to the next two or three slides, we’ll talk about the acquisition environment and the overall state of the market and the freight market. Slide 9 show supply demand dynamics over the last dozen years or so on the left hand side, and more importantly on the right hand side looks at forecasts for this year 2014 and next year 2015. It also shows the estimates for 2013 outstanding for that year or shows capacity growth of 5.4%, a little ahead of demand growth which was at 4.7% overall half of the global market. For 2014 and ’15, the relationship is expected to reverse with demand growth exceeding supply growth, which is clearly good news. However, and as we’ve discussed before we need to drill down at least one layer below the global level to look at the dynamics for small to mid-size vessels which in our mind range from around 2000 TEU to around 7,500 to 8,000 TEU. I’d say those mid-size and smaller vessels versus vessels in the larger size categories.

On Slide 10, on the right hand-side, I’ll show you some of that segmentation which shows the order book to fleet ratio by vessel size. And you can see that it is substantial for the larger vessel sizes, particularly for the mega vessels 12,000 TEU and above, where the order book today represents over 75% of today’s capacity. Conversely, the order book for mid-sized and smaller vessels is modest at an average of around 6% or so, which deliver spread over two or three years, might give an annual growth rate of 2%, possibly 3%.

Confirming this with accelerated scrapping rates that we are seeing, 2013 was a record year for scrapping, and year-to-date scrapping activity is at an even higher rate than we saw through 2013. And bear in mind this is mostly driven by short-term economic practice others are simply running out of liquidity, at least some of these are running out of liquidity. And so combined, the modest fleet growth from new buildings with scrapping activity in the mid-sized ship and smaller fleets could remain flat or even contract a little over the next couple of years.

It is interesting to think about why the order book is so heavily skewed towards larger vessels. I believe this is due to the fact that the time when cost control is absolutely vital, the freight rate environment is fragile and not terribly supportive. Operations are chasing unit cost efficiencies, that the ever larger ships deliver, and consequently the limited amounts of investment capital that’s available to the sector and remember the traditional German KG source of finance has essentially dried out. That limited amount of investment capital is being directed at large strategic tonnage to give operators a unit cost efficiency and competitive advantage or a catch up where they need to -- because others have moved more quickly than them.

The minimal order book for smaller or mid-sized vessels, combined with the fact that these types of vessels are necessarily deployed on the non-main lane trades, which in aggregate represents the majority of world container trade pie chart on the right hand side of Slide 10 shows these trades represent around 70% of global trade and are particularly the intra-Asia is the most important subset of trades at around a third of total global trade. Combine that with the fact that these trades have also shown the most resilience in recent years with growth rates of 5%, 6%, 7%, and so just to us that these vessel segments, despite being under some pressure in the near term have favorable prospects in the medium term. Consequently that’s where we would direct our investment capacity.

Turning to slide 11 and as you can see that charter fleet asset values are close to historic lows. This chart shows scrap value at the bottom, a 15 year old hypothetical 4,400 TEU vessel, next line up, and then a 5 year old vessel and finally a new building price. And for certain vessel segments such as this one, asset values are around 80% below the historic 2008 peak. With that dry [ph] power, we’re well positioned to take advantage of the cyclical low and expand our fleet. And as I mentioned before achieving strong return to shareholders including and importantly generating incremental cash flow and positioning the company to benefit from future increases in asset values and charter rates.

Incidentally the up-tick that you can see in new building prices, this is more a function of yards filling slots with orders for other types of vessels, dry bulk and tankers for example rather than upward pressure on container ship new building prices in isolation.

The final slide in this section, Slide 12, looks at freight rates and CMA CGM’s financial performance. The message remains much as the same as throughout the last couple of years; the freight rate environment is volatile and fragile. Nevertheless CMA CGM continues to outperform, delivering operating margins well above the average of those lines of companies that publish sufficient data to complete the analysis. Indeed they are normally number one or number two in the pack.

I would now like to turn the call over to Susan to review the financial results.

Susan Cook

Thank you, Ian. Please turn to Slide 14 for a summary of our financial results for the three months ended March 31, 2014. We generated revenue of $34 million during the first quarter from fleet of vessels down $1.2 million from revenue of $35.2 million in the consolidated period in 2013. The decline in revenue is due mainly to reduced revenue from two vessels which were renewed at lower rates in May 2013 and the amended rates on the four 2,200 TEU geared vessels. These charters were extended by three years with effect from February 1, 2014 this year. Together with the temporary reduction in rates to Julie Delmas -- one of the cranes is not fully operational.

This was partially offset by low off-hire [ph] at five days in this year’s quarter compared to 26 days and that included 21 days for scheduled dry dockings in the 2013 quarter. 99.7% utilization in Q1 2014 compared to 98.3% in the same period of last year. There was no off higher (25:30) as I just said for scheduled dry docking in the first quarter this year with only two vessels scheduled to undergo regulatory dry docking late 2014 and none in 2015.

Vessel operating expenses were $11.5 million for the three month period with an average cost by ownership day of $7,538, down $8 per day or 0.1% on $7,546 for the comparative period of 2013 with increases in crude costs more than offset by lower cost of lubricating oil due to lower consumption. Interest expense for the three months ended March 31, 2014 was $8.1 million, including the amortization of deferred financing costs, within that some $3 million accelerated write off for the remaining balance of such costs associated with our previous credit facility and the amortization of the original issue discount on the $420 million notes. But this is excluding the effect of interest rate derivatives which do not qualify for hedge accounting. In the prior year period, interest expense was $4.9 million and average borrowings under our credit facility of $425.7 million and $45 million of preferred shares throughout the period.

Our derivative hedging instruments, which were terminated on March 19th is a realized loss of $2.8 million in the three months ended March 31, 2014, the settlements of swaps in the period as LIBOR rates were lower than the average fixed rates. Further, there was a $1.9 million gain for revaluation of the balance sheet position as of March 19, 2014. This compared to a realized loss of $5.4 million and a $5.5 million unrealized gain in the comparative period.

Net income for the first quarter was $1.8 million, including the $1.9 million non-cash interest rate derivative mark-to-market gain and a non-cash $3 million accelerated write off of deferred financing costs. For the prior year quarter, net income was $7.2 million, off to a $5.5 million non-cash interest rate derivative mark-to-market gain. And normalized net income adjusted for certain non-cash items was $2.9 million for the three months ended March 31, 2014 and $1.8 million for the comparable period last year.

The next slide, Slide 15 shows the balance sheet. And the key item here as of the end of Q1 2014 includes cash of $55.2 million, our total assets of $886.2 million of which $807.9 million is vessels, total debt of $458.7 million, including the preferred and shareholders’ equity of $401.4 million.

The next slide shows our cash flows. The main items to mention here are net cash provided by operating activities of $20.7 million in the first quarter and net cash provided by financing activities was $32 million, also the issuance of the secured notes and the repayment of borrowings under our previous credit facility.

I would now like to turn the call back to Ian for closing remarks.

Ian Webber

Thank you, Susan. Before we move on to questions, I’d like to draw your attention to Slide 17 where we briefly summarize the Company’s core strengths and reiterate our strategy for creating value for all of our shareholders. Firstly, aside from the two 4,100 TEU vessels which I’ve already discussed our fleet is fully contracted through late 2017. As I mentioned, we’re in active discussions on a new charter for Aquarius at market rates. For Orion, we expect the vessel to be redelivered in May and we’re exploring various alternatives, including re-chartering, layering up or disposing.

With our recent charter extensions, our total contracted revenue increased by $54 million to $932 million and the weighted average remaining term of our contracts increased to 7.6 years. The long term nature of our contracts provides us with a stable source of revenue for years to come and had a significant visibility on cash flow. Second with only two dry docking scheduled between now and the end of 2015, in addition to lower debt service following our refinancing, the lower overall debt service following our refinancing, we should see -- continue to see strong cash flow generation and free cash flow for investments in the business.

Finally with the recent notes offering, we significantly enhanced both our financial strength and our flexibility to allocate capital in such a way as most benefits to our shareholders. We’re now able to pursue growth through accretive acquisitions at a time when asset values are at cyclical lows and when we’re now free of covenant restrictions under the old credit facility that among other things precluded us from growth and precluded us from looking forward to paying the dividend. We’re very optimistic about GSL’s prospects and we’re enthusiastic about the acquisition prospects and with that I’d like to hand the call over to the operator, who can explain the Q&A process.

Question-And-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Omar Nokta from Global Hunter. Please go ahead.

Omar Nokta - Global Hunter Securities

I just wanted to go over the acquisition opportunities. You did a nice discussion on that and in the presentation you have the mid-size and smaller vessel segments as special opportunity. Could you give some sort of specifics as to where within that do you see probably the best opportunity? And then also and I’m not sure how much you could actually say, but if you could handicap it, would you say that an acquisition could be completed within this quarter or would that be more of a second half event?

Ian Webber

We don’t really want to be too constraining on what we look at and how we describe what we’re looking at because in this business unusual opportunities can arise from to time which is that are outside the strict criteria that we might have set for ourselves. But by and large mid-sized and smaller, we like geared tonnage particularly but it doesn’t have to be geared.

The crucial thing for us on any opportunity that we’re looking at is that it delivers the appropriate returns that we’re looking. We bear in mind our cost of capital and crucially we bear in mind the need to generate incremental cash flow in the immediate term from those acquisitions. As the timing, it’s really difficult to forecast and I simply don’t want to speculate but this is a high priority for us we’re for the first time in a position to deliver on growth. We want to be disciplined about it. We have a rigorous approach to investment appraisal as you would expect from the type of sort of financing institution that we are. And we are actively looking at opportunities now --forecasting when those might be delivered is really tough.

Omar Nokta - Global Hunter Securities

Yes, that’s fair. I figured as much. In your comments you also discussed the opportunity of maybe structured contract, sale leaseback. Now that CMA is -- they’ve been obviously healthier but also they’ve been looking at taking more active role within GSL. Have they approached you whether formally or informally maybe about doing sale leaseback directly?

Ian Webber

You wouldn’t expect me to comment on any discussions that we may or may not be having with CMA CMG or indeed anybody else. We see the value in diversifying our charter coverage. I mentioned that in our prepared remarks. We’re very happy with CMA CGM as a counterparty. They’ve been very supportive of us throughout our life as a public company and we look forward to continuing strong relations with them. But we do need to develop relationships with other customers as well.

Omar Nokta - Global Hunter Securities

Okay. And then just wanted to just switch over to the dividend potential, and I just want to make sure I have the information correct as I read it in the bond filing, that basically -- there is a current maximum of $7.5 million which will be about $0.15 or $0.16 a share. Is that correct? And then also does that change if you put the $70 million to work that you have currently in liquidity? Does that $70 million that -- whatever comes in, would that be incremental to the current $7.5 million limit?

Ian Webber

Yes, to both of your answers -- the answers the both of your questions. Firstly, you’re right, that right now we have a limit of $7.5 million under the venture which we’re allowed to pay away at the dividend come what may. And you’re right, there is approximately $0.16 for each share. So in theory we could pay our $0.04 dividend each quarter this year or for the next year. And you’re also right and this is why we’re -- crucially why we’re focused on acquisition opportunities that generate incremental cash out of the gate and provide incremental earnings to us because our ability to pay a dividend has increased by 50% of consolidated net income which is a defined term. And broadly it’s counting net income but there are some subtleties to it. So we want to grow our income and expenditure performance to be able to grow our ability to pay a meaningful and sustainable dividend.

After that actually that our ability to pay a dividend, the basket of let’s [indiscernible] has increased not only by 50% of consolidated net income but also of any equity that we would issue and we understand that at some time we’re going to need to issue equity to provide funds for growth for further growth. We’re quite comfortable now. We’ve got $70 million plus to invest today. We think that’s enough right now. We want to get some growth under our belt but we can see the need to raise equity. An equity raise fulfills at least two functions. One it provides us cash to invest in further growing the business and secondly it also counts to increase the amount of dividend that we can pay, bondholders will allow us to use the notional [ph] amount of equity that we raise to pay away dividend in the future.

Operator

Thank you. So we’ll take our next question from Chris Snyder from Sidoti & Company. So Chris, please go ahead.

Chris Snyder - Sidoti

So I just had a couple of quick follow up questions on the potential acquisitions. I know it seems like you guys are pretty set on acquiring vessels with contracts attached that will be accretive. Can you give us some idea on the length -- the contract link that you guys are looking at or the range there?

Ian Webber

That’s a tough one. The resource of transactions such as [indiscernible] leaseback transaction because that’s the easiest perhaps to understand conceptually; the exact terms that you end up as a result of a bilateral negotiation between us as buyer and potential owner and whichever line of company that is on the other side of the transaction but typically we would be looking at three to five, maybe a little bit longer in terms of duration of that sale on leaseback transactions charter.

Chris Snyder - Sidoti

And then just another one. You said you guys have about $75 million I think in dry powder to put the used freight away and then obviously that will go up as you guys continue to generate strong cash. Well I guess just based on the $75 million now, could you give us some idea on how many vessels you think you can acquire with that $75 million?

Ian Webber

Well, that’s a question we get quite a lot and it sort of depends on how expensive they are. We don’t want to do distressed transactions because they don’t generate incremental cash flow immediately but we could buy five or six distress Panamax vessels. Alternatively it might be a couple of sale and leaseback type transactions; difficult to tell but it’s more than one and less than 10.

Operator

Okay, thank you. (Operator Instructions) And our next question comes from Mark Suarez from Euro Pacific Capital. Mark, please go ahead.

Mark Suarez - Euro Pacific Capital

I am sorry if I missed it in the beginning of the conference. But can you tell us when exactly you took delivery of the Aquarius and if you expect employ such [ph] on the second quarter with a new charter or I think you mentioned you’re thinking of [indiscernible]?

Ian Webber

I would say it was returned to us on April 26th, so four days ago and we said on the call that we were in active discussions with a potential charter other than CMA CGM for a short term fixture at market rates.

Mark Suarez - Euro Pacific Capital

And so you think this will be a second quarter, do you feel confident you can employ this vessel in this quarter, second quarter?

Ian Webber

I don’t want to prejudge anything. We’re feeling sort of pointed [ph] about it that all sorts of things happen. It would be I guess pretty good -- if we can deliver on it Mark.

Mark Suarez - Euro Pacific Capital

Got you. Now in terms of the vessel Orion, do you think that you feel confident or do you feel that you could re-charter this vessel back to CMA CGM or will this be for a new counterparty as well?

Ian Webber

Okay. Well, not again but as we’ve said on our last call, when we were looking at Aquarius coming back to us in about four or five weeks’ time, it’s a bit too early to tell the options. We’ve got at CMA CGM our another charter or laying the vessel out if we think that’s the right thing to do because the client prospects look good in the relatively near future or alternately disposal and potentially reinvesting proceeds in different tonnage. Can’t speculate as I’m sure you understand on the outcome of that. Its maybe four weeks away and the charter market into those environments has a very short use.

Mark Suarez - Euro Pacific Capital

Got you. Are those rates in and around the 7,000 mark still by the way since last quarter, Ian?

Ian Webber

Yes, about that. Maybe they firm the touch [ph] but not materially.

Mark Suarez - Euro Pacific Capital

Got it. And now in terms of four geared vessels, I know you’re going to re-charter this. Are those rates more or less the same or the same rates as since the beginning of the year? How are those rates trending are right now?

Ian Webber

On the geared vessels?

Mark Suarez - Euro Pacific Capital

Yes, on the geared, the four geared vessels you currently re-chartered.

Ian Webber

Spot rates have probably firmed a little, but again not materially. It’s not - they’ve not doubled or anything, gone up by 50%. I think we said previously that market rates are around $8,000 - $8,500 but they might have gone up by $350 or something like that but it’s really not going to make anybody’s fortune unfortunately.

Mark Suarez - Euro Pacific Capital

Yes. And now just to go back on what you were talking, you were saying in terms of acquisitions on second hand that you seem to have a priority or at least a preference over charter attach acquisitions. You mentioned or eluded to maybe geared vessels over gearless vessels to add the incremental cash flow. What about sort of those distressed sources? Have you seen an increased selling activity from distressed financial sources maybe in light that now they want to get rid some of those vessels, get it off their balance sheet because they’re getting in desperate mode? Have you seen any increased selling activities from those types of sources this year?

Ian Webber

Yes, probably it’s a little difficult to tell because those need a sort of huge deal flow but our feeling is that there are more transactions being done and coming on to the market. Now is it because the owners were largely German, have come under increased and look to see increasing financial pressure lack of liquidity as we discussed before from charters which have been half of the money and special surveys that are imminent within the cost [ph] of million dollars or whatever and the single ship owning company that is the KG just hasn’t got the cash to support operating losses or maintenance CapEx.

And banks won’t support them and equity won’t put any more in. So we are seeing greater deal flow there but I reiterate that that is the second -- of secondary interest to us because although you to a degree protect your downside by buying and close at scrap value, you can only deploy the vessel in the spot market earning spot rates and therefore in the near term the charter will be cash neutral effectively and that we don’t think is right for us today.

Mark Suarez - Euro Pacific Capital

Got you. So for you to sort of go into a transaction like that, returns were have to extremely attractive for you to legitimize the opportunity cost of not increasing your cash flow. Would that be a fair assessment?

Ian Webber

That would be a very fair assessment.

Mark Suarez - Euro Pacific Capital

Okay, great. I think that’s all I have for now. Thanks for your time.

Operator

Thank you. And we’ll take our next question from Zach Pancratz from DRZ. Please go ahead.

Zach Pancratz - DRZ

I kind of want to dig in to the sale and leaseback example that you’re kind of -- that you’ve thrown out there. Given that we are at the bottom of this cycle and that you’re looking to book on long term contracts, how are we supposed to think -- I mean are your counterparties willing to give you maybe a little bit higher rate or is this something where you would have to pay a higher price in turn for a higher contract rate?

Ian Webber

It is a structured transaction and it’s a sort of closed circle really, but yes fundamentally the sale leaseback transactions that we’re seeing in the markets and that we’re interested in doing, you do have to pay on the face of it a little bit higher than the charter free asset value. But the corollary to that is that you’re getting a charter rate for a fixed period of time that you can count on which is above spot rates and is cash accretive and they are still taking into account the residual value be it asset value, base value, disposing of the vessel at the end of that first charter, the three to five years or whatever it might be or if you run the vessel to end of life, looking at charter rates in the residual period. Those types of transactions, despite paying over market for the vessel on purchase, because of the above market initial charter rates still generate returns that we see as attractive.

Zach Pancratz - DRZ

And those returns are low to mid-teens?

Ian Webber

Yes, the estimate is potentially higher depending upon your assumptions about residual value and obviously if the industry recovers more strongly and more quickly than our model has, then the returns are improved.

Zach Pancratz - DRZ

And then you used this few times where you’ve said meaningful and sustainable dividend and what I’m thinking for that and tell me if I’m wrong is that the decision on the dividend probably won’t occur until after you guys have exercised the $70 million in liquidity in order to maybe increase your capacity to pay a dividend and protect it for the long term. Is that correct or is the dividend decision going around your next board meeting?

Ian Webber

Well, the Board always has regard to dividend. It’s not a -- now we’ve made the decision at the end of April and we’re not going to revisit it for another year or two years. It’s not like that. It’s very dynamic. But by and large you’re correct. As I hope I indicated on the call earlier in the prepared remarks, we want to grow our capacity to pay a dividend so that it can be greater than the $0.04 per share for a year that we’re currently limited to and that it’d be sustainable. Whether we have to deploy away all $70 million, I don’t know but for sure we want to get some growth under our belt to begin with.

Operator

Thank you. And our next question comes from [indiscernible] from Zebra Capital. Sir please go ahead.

Unidentified Analyst

One quick question. As you’ve described your preference for sale leaseback transactions as opposed to distress purchases given the immediate incremental cash flow, can you describe the thought process behind looking to re-charter the Aquarius at obviously spot rates that may not be much greater than the cost of operating the vessels versus divesting them and recycling that capital towards more accretive sale leaseback transactions?

Ian Webber

Sure. We see if we are able to secure a charter for six months or whatever it would be, we see that as being -- buying further time see how the market develops on this particular asset class. We don’t -- don’t take this our own way but we don’t need the $7 million or $8 million or $9 million that we might be able to get from selling this vessel for investment right now because we’ve got $70 million plus in the tank already. The decision on what to do with the vessel at the end of any charter that we may or may not be able to put in place may well be different. We’ll have to see.

Unidentified Analyst

Okay, and as it relates to diversifying a way for CMA, what this is going to be? Can you speak a bit about the repositioning costs for re-chartering those vessels?

Ian Webber

Well, that’s a really good point. We have to move the vessel from wherever in this place CMA CGM drops it off which, happened to be in Colombo in Sri Lanka to where a new charter would like the vessel and those costs can be significant. And therefore they form an essential part of the investment appraisal.

Unidentified Analyst

Okay. So, that will be taken into consideration as to whether you enter into a six month charter or not?

Ian Webber

Yes. [Indiscernible] for example it is the case and it is not for the Aquarius but if it is the case, there is a special survey coming up that we would have to fund. So we throw all of those factors into the analysis. Yes, one if I would say is that most charters allow the vessel to be sold with the charter attached. So sort of completely hypothetically just because we lockup Aquarius on a charter doesn’t mean that we cannot also look to sell that during the period of that charter and in some cases it’s easier to sell a vessel to an owner with a charter in place. So we’re not eliminating the possibility of a sale by re-chartering any of ships at the end of term.

Operator

Okay. So, ladies and gentlemen, this does conclude today’s conference. You may now disconnect and have a great day.

Ian Webber

Thank you. We look forward to talk to you on Q2.

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