Textainer Group Holdings' (TGH) CEO Phil Brewer on Q4 2015 Results - Earnings Call Transcript

| About: Textainer Group (TGH)

Textainer Group Holdings Limited (NYSE:TGH)

Q4 2015 Earnings Conference Call

February 11, 2016 11:00 AM ET

Executives

Hilliard Terry – Executive Vice President and Chief Financial Officer

Phil Brewer – President and Chief Executive Officer

Robert Pedersen – President and Chief Executive Officer-Textainer Equipment Management Limited

Analysts

Helane Becker – Cowen and Company

Art Hatfield – Raymond James

Doug Mewhirter – SunTrust

Shawn Collins – Bank of America

Bob Napoli – William Blair

Michael Webber – Wells Fargo

Operator

Welcome to the Fourth Quarter 2015 Textainer Group Holdings Limited Earnings Conference Call. My name is Katie, and I will 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 that this conference is being recorded.

I will now turn the call over to Executive Vice President and Chief Financial Officer, Hilliard Terry. Mr. Terry, please go ahead.

Hilliard Terry

Thank you, Katie, and welcome to Textainer’s 2015 fourth quarter and full year conference call. Joining me on this morning’s call are Phil Brewer, TGH President and Chief Executive Officer. After 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 predictions and may differ materially from 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 the statements that are made.

Please see the company’s Annual Report on Form 20-F for the year-ended December 31, 2014 filed with the Securities and Exchange Commission on March 13, 2015, and going forward, any subsequent quarterly filings on Form 6-K 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 measure to the most directly comparable GAAP measure will be provided either on this conference call or can be found in today’s earnings release.

At this point, I’d now like to turn the call over to Phil for his opening comments.

Phil Brewer

Thank you, Hilliard. I would like to welcome all of you to Textainer’s fourth quarter and full year 2015 earnings call. The fourth quarter was a challenging quarter just this 2015 was a challenging year. We’ve stated the reasons many times already, new container prices declined about 25% during 2015, primarily due to falling steel prices and limited demand for new containers.

The decline in new container prices combined with continued low interest rates, resulted in low rental rates, not just for new containers, but also for containers being extended under maturing leases.

Low new container prices also pushed down used container prices. Additionally container demand was weaker than expected due largely to trade growth of approximately half, the 4.5% rate predicted at the beginning of the year. There was no third quarter weakened demand and only a limited pickup prior to Lunar New Year.

Notwithstanding the difficult environment, 2015 lease rental income was up 1% compared to the prior year. Total revenue declined 4% largely as a result of lower resale prices and reduced trading containers sold.

Operating expenses increased primarily due to large increases in – excuse me operating expenses increased primarily due to severance payments and professional fees. Excuse me, operating expenses increased primarily due to larger increases in depreciation and container impairments.

SG&A increased due to non-recurring professional fees and severance costs. The result is that adjusted net income totaled $108.7 million for the year or $1.90 per share. We declared a quarterly dividend of $0.24 per share in line with the previous quarter. As already stated, container impairments had a significant effect on our results.

For the year, these non-cash impairments reduced our adjusted net income by $30.4 million. Majority of these impairments stemmed from containers that are moved to sales inventory.

As a reminder, when a container is returned from lease, we decide whether to sell or keep it based on its condition, location and age. If we decide to sell the container, we immediately write-down its value to the expected sales price at its current location, even though we may not sell the container for some time, or may move it to another location for sale.

Unless or could avoid taking this write-down, if we were to keep the container and as lease out fleet. This will eliminate the need to recognize an impairment, but lead to an increase in storage cost and further decline in utilization. We believe our policy is discipline and provide investors with the most accurate view of our performance.

Furthermore we are unlikely to lease out an older container for a long time given the challenging market we see today. Delaying sales is almost always the wrong business decision.

Utilization remained relatively high, notwithstanding the unexpected weakness in demand, falling only 2.9 percentage points over the year to 94.6% at year end. Because of the long-term nature of our leases, average rental rates declined only 4.8% even though new container prices fell 22%.

85% of our fleet is subject to long-term leases and finance leases with an average remaining term of 40 months. Only 8.5% of this fleet matures in 2016, which will mitigate the impact of the downward repricing risk we face this year.

The level of new dry container inventory at factories continues to decline and is now around 770,000 TEU. Approximately 510,000 TEU of this total is leasing company inventory which is only two months demand during normal market conditions.

Less orders have shown restraints in ordering new containers. Dry freight production totaled 2.4 million TEU during 2015, compared to more than 3 million TEU the prior year. The manufacturers are currently closed for Lunar New Year and expect to remain so at least through the end of the month.

We’ve invested more than $600 million in containers for lease out in 2015. We’ve purchased more than 235,000 TEU of new and used containers, of which 97% was for our own fleet. We invested relatively more in refrigerated containers and less in dry freight containers when compared to prior years.

Forecast for global trade growth for 2016 are in the range of 3% to 4%. Container ship capacity is projected to grow 4.6% this year, after adjusting for expected delivery deferrals. However, idle capacity currently totals more than 6% of the container ship fleet.

As a result, freight rates are expected to remain under pressure for 2016. Attempts by the shipping lines to enforce GRIs have generally failed within a week of their commencement leading to freight rates at or close to loss making levels.

We expect container demand to remain sluggish for at least the second quarter of 2016. On a positive note, we expect a strong demand for reefers to continue throughout the year.

New container prices continue to decline in our below $1,400 per CEU currently. The last time container prices right this level was 2002 to 2003. The containers we purchased at that time proved to be very good investments. We have said before and will say again, that we believe containers purchased at today’s prices will generate attractive returns over their lives.

Textainer’s resale team sold 160,000 containers last year, a record pace of sales. While the prices were disappointing down 10% to 15% over the last six months and 15% to 20% over the last year. We continue to demonstrate that we are able to sell containers when the cash flow analysis indicates that selling maximizes the return on assets. We do not expect used container prices to recover prior to an increase in new container prices and an improvement in utilization.

The outlook for the first half of 2016 remains challenging. Improved performance requires an increase in demand, container prices and/or interest rates. We do not foresee any of these occurring in the near-term. Demand remains muted, neither container prices nor interest rates are expected to increase materially in the near-term.

A maturing leases that are extended will be repriced at lower rental rates. These factors are expected to result in lower financial results in 2016. We must keep in mind that our industry is and always has been cyclical. We have been in business for 35 years and have successfully managed through many ups and downs.

We had the lowest leverage in operating costs of any of our public competitors. We have a reputation as the most reliable supplier of containers and have established trading and resale operations.

We believe our share prices not properly reflected factors in the contracted and projected cash flows over the 13 plus year useful lives of our containers. We believe we are well positioned for the challenging market conditions we expect.

I will now turn the call over to Hilliard.

Hilliard Terry

Thank you, Phil. I will now review several key factors influencing our results this quarter. Lease rental income was $124.6 million, down 3.7% due to an increase in average per diem rental rates and a declining utilization partially offset by an increase in the size of our own fleet.

Having a fleet of which 85% is on long-term and finance leases, with an average remaining term of 40 months helps to mitigate the effects of changes to new container rental rates. Also as leases reprice, they generally do not reprice at the rate for new container lease outs due to repair, repositioning and related costs. Lower sales prices resulted in a small loss on fleet container sales in spite of record sales volume.

The larger impact of lower sales prices as the resulting container impairments. As we mentioned last quarter, we saw a significant amount of container for impairments resulting from a write-down or mark-to-market of containers held for sale to their net realizable value.

This quarter we saw further increase in container impairments which totaled $15.2 million or $0.25 per share. On a go forward basis, we will separate out the container impairments on our income statement. So that you can clearly see the effect which we expect could continue at this level as used container prices remain low.

On the expense side, direct container expenses increased $4.7 million or 46% to $14.9 million for the quarter. $2.9 million or more than half of the increase was due to higher storage costs, due to lower utilization and an increase in daily depot storage rates. Repair and recovery costs for slow paying or bankrupt lessee also increased.

Depreciation expense was $51.6 million for the quarter, up $8.9 million year-over-year. Included in the increase, was the $4.7 million of additional expense resulting from the Q3 change in the residual values of our 40 foot high-cube containers. The remaining portion of the increase was due to the larger fleet size of our own fleet, partially offset by lower new container prices.

Annualized depreciation expense for the quarter was 4.5% of average container cost, and we expect annualized depreciation expense to be 4.6% to 4.8% of average container cost. This quarter we posted $133,000 recovery due largely to lower loss provisions for slow paying customers. We believe and we continue to believe that our bad debt expense should on average run within 0.5% to 1% of revenues.

Our interest expense including realized hedging costs, but excluding the write-off of unamortized bank fees and unrealized loss on interest rate swaps was $22.1 million for the quarter, up 3.2% versus the year ago quarter. This is less than 5.4% increase in our average debt balance.

We continue to benefit from our refinancing activities over the past year or so. Our average effective interest rate which includes realized hedging cost is currently 2.90% a decline of six basis points when compared to the year ago quarter.

As of quarter end, approximately 80% of our debt is fixed or hedged. Consistent with the percentage of our own fleet, owned fleet subject to long-term and finance leases. The weighted average remaining term of our fixed and hedge debt is 47 months and the weighted average remaining term of our long-term and finance leases is 40 months.

Income tax expense for the quarter was $2.4 million, resulting in higher than normal effective tax rate given our lower net income and discrete one-time items. Adjusted net income for the quarter was $12.7 million, or $0.22 per common diluted share. This number includes $0.08 per share of the increased depreciation expense as a result of the Q3 change in residual values of our 40 foot high-cube containers.

Additionally the container impairments resulting from the write-down of containers held for sale reduced our earnings by $0.25. We can see high level of container impairments continue into 2016 if disposals continue and resell prices remain at current levels.

Turning to the balance sheet. As of December 31, 2015, our cash position was $116 million with stand by liquidity of approximately $600 million. Total assets were $4.4 billion, container contracts payable were down due to year-over-year, lower level of container purchases and again there’s an $11 million receivable for insurance proceeds that we talked about last quarter which includes additional recovery expenses incurred in the fourth quarter.

We continue to generate strong cash flow. Depreciation expense and container impairments resulted in an additional $50 million of noncash expenses affecting our P&L. In fact, our cash flow from operations increased year-over-year in spite of our lower adjusted net income.

We are confident in our ability to continue to generate strong cash flow during this challenging environment. Given that approximately 85% of our fleet is subject to long-term and finance leases.

Another indication of our strong cash flow is that adjusted EBITDA was 80% of total revenue compared to 78% in the year-ago quarter. We declared a dividend of $0.24 per share in spite of lower net income. While this is slightly over 100% of our adjusted net income, we do not believe the large noncash items should be factored into the payout.

In fact if you exclude the noncash items such as depreciation, impairments, long-term incentive pay and unrealized gain on interest rates swaps from our adjusted EPS. You will see that we are paying out roughly 18% of our cash earnings which is the same as last quarter.

As a reminder also, some or all of such of our distributions may be treated by U.S. shareholders as the return of capital rather than dividends.

Last quarter, the board authorized to repurchase of up to $100 million of the company’s common shares. During the fourth quarter, we repurchased 630,000 shares at an average price of $14.49 for a total amount of $9.1 million.

Thank you for your attention, and now I’d like to open the call up for questions. Katie, can you inform the participants of the procedures for the Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Helane Becker from Cowen and Company. Helane, please go ahead.

Helane Becker

Thanks very much for your – hi, guys. Thank you very much for your time. I just have a couple of questions. Do we have to, the first question is with respect to values of used containers. A few years ago, you were increased the values when new container prices were substantially higher. Is that something we should think about as a readjustment factor going forward? That you would bring those values back down?

Phil Brewer

Hi, Helane. Thank you for joining the call. This is Phil. We are obviously looking at our residual values and we took action in the third quarter of last year when we reduce the residual values of 40 foot high-cube containers. And that’s something we continue to look at, if it’s necessary to do so, we will certainly do so, if we think we need to change residual values for any of the other container types.

Helane Becker

Okay. And then my other question is with respect to kind of the long nature of the leases and so on. So, Phil you’ve been around this industry for a while and I’m just kind of wondering when – like the last time you guys adjusted your or the last time dividends came down or we went through this major recession in 2008 or 2009. They kind of bottomed, the stocks kind of bottomed and then started to improve. I would say, within about nine – six or nine months later. And I’m just kind of wondering, does it feel to you like we’re seeing a bottom when you compare this to other downturns or does it feel like things are still – things still have a ways to go?

Phil Brewer

As we said in our opening remarks Helane, I think 2016 is going to remain a challenging year. As far as container prices, we see them continuing to decline on the new container side. Although the rate of decline has clearly slowed down and the data we have would indicate that current prices are around the cost of production, perhaps even slightly below cost of production. So there is some room to think that container – new container prices themselves may be around a level at which – while I think they could – decrease a bit more, I don’t think we’re going to see dramatic decreases. Used container prices, as you know, are often based off of new container prices.

Helane Becker

Great. Okay.

Phil Brewer

As far as the market picking up, I think that, as we said I think this year itself is still going to remain a challenging year.

Helane Becker

Still another tough year, okay. And then finally, the last question that I tend to get from investors is with respect to your debt levels, and I know I asked this on the conference call last time. But do we have to be concerned that your debt is getting upside down that you owe more than the containers are worth?

Phil Brewer

Helane, we are really, when you look at our debt covenants, we are in compliance with all of our debt covenants. And what you’re referring to really is, probably around the leverage covenant and relative to sort of our public company peers, we have the lowest amount of leverage. So we stress test our covenants and in particular to leverage we think we are fine there.

Helane Becker

Okay. Thank you very much, gentlemen.

Phil Brewer

Thank you, Helane.

Operator

And our next question comes from Art Hatfield from Raymond James. Art, please go ahead.

Art Hatfield

Hi, good morning, everyone. Hey, I was kind of wanted to follow-up on – one of Helane’s questions about the cycle. In the past, when you seen things bottom out and pick up. What’s the first metric that typically turns, that gives you confidence that things are getting better?

Robert Pedersen

Hi, Art. This is Robert Pedersen here. Well, the first thing is we start seeing some demand for containers. And as soon as we start seeing some pull, then the other fundamentals generally follow, some interim afterwards. Now we talk about cycles, we are toward the – in the Chinese New Year the period right now and we did actually see some interesting demand in January that we had not seen last year.

We had several global carriers actually running short of containers, they were not kind of fundamental shortages, but they were at – have shortages. But just by the fact that it happened was, a little bit of encouragement if I could put it that way. Because honestly we have not seen that in the last year, many containers have been sold, dispose of in 2015 and new building was down compared to 2014. So with new container prices seaming to level out, there could be some demand coming up in the future. But, you know whether shipping line, operating vessels that relatively low slot utilization that it’s still easy for our customers to move their inventory around, get the containers back from surplus locations to demand locations.

So seeing that – expecting that we’re going to see very strong demand, certain in the first half is probably a long shot.

Art Hatfield

Okay, that’s very helpful. And I kind of want to follow-on with that, with kind of more looking out say over the course of the year. If we get the levels of growth kind of are expected this year and they come in as expected. And let’s say container volumes, I don’t know what will end up building the share, it’s really kind of, I guess hard for everybody to project that. But if we get those levels of growth that are projected, do you think that really works out the imbalances within the industry or it does just something that may have to take multiple years to correct?

Robert Pedersen

Well, you probably noticed that the world’s largest shipping line came out with their financial results yesterday. And they stated that they expected 1% to 3% growth in 2016 compared to less than 1% in 2015. That’s obviously a positive sign but is that sufficient to pull the market and our business through the cycle, probably not this year. I think we need greater growth in that. There is also still surplus inventory on the ground, probably about 770,000 TEU of new production, sitting at factories, they’re winning lease out of the dry container side. And many depots are pretty full so it takes a while before the replenishment will take place. On a positive note though the reefer market is very different than that and what strong all 2015 and we expect a strong 2016 as well.

Art Hatfield

Great. Thanks for your time this morning. I’ll jump back in line.

Phil Brewer

Thank you.

Robert Pedersen

Operator, next question?

Operator

Our next question comes from Doug Mewhirter from SunTrust. Doug, please go ahead.

Doug Mewhirter

Hi, good morning. What is your utilization right now or whatever at the – as of December 31, if you prefer that figure?

Phil Brewer

Well, I mean, we – our utilization as of last week is 94.2%.

Doug Mewhirter

Okay. Thanks for that. And you start with pretty large stock share repurchase authorization. And it seems like you have a lot of flexibility in terms of CapEx because there’s not – I mean there’s just not a lot of demand out there. I mean $100 million of buyback authorization. I mean you can buy 20% of your company now at 10% on leverage yield. And I would say – and you’d probably still have – some left over for CapEx. So I’m a little surprised that you weren’t quite as aggressive in the fourth quarter given the – you really didn’t have to make a lot of CapEx?

Robert Pedersen

Well, during the fourth quarter, we actually had not filed a plan. So we were not purchasing shares during the blackout period, Doug, which is part of the explanation for the quantity of shares purchased. However we will – our plan has a two year life. We’ll continue to monitor our share price and act under the plan as we see makes sense going forward.

Doug Mewhirter

Okay. You said that 8.5% of your term lease fleet expires in 2016. What’s the approximate figure for 2017 percentage was?

Hilliard Terry

For 2017 it’s lightly smaller than 8.5%. I think it’s six point something percent, please don’t call me on that exactly, but it is a little bit less. Another point to keep in mind is that the average rental rates on the leases that are maturing this year is actually below the average rental rates on the leases that matured last year.

So we don’t have a significant percentage of our fleet that’s maturing this year, first. And second for those leases that are maturing, the rental rates are already lower than what we saw in the maturing leases last year.

Doug Mewhirter

Okay, thanks that’s all my questions.

Phil Brewer

Thank you very much, Doug.

Operator

And our next question comes from Shawn Collins from Bank of America. Shawn, please go ahead.

Shawn Collins

Great, thank you.

Phil Brewer

Thank you, Shawn.

Hilliard Terry

Hi, Shawn.

Shawn Collins

Hi, guys, hi Phil, Hilliard, Robert good morning.

Hilliard Terry

Good morning.

Robert Pedersen

Good morning.

Shawn Collins

So you just touched upon current market rental rates, so I wanted to ask on Slide 30, you do a great job of laying out the portfolios average per diem rates. Can you just tell us where market rates are today on a per day basis?

Hilliard Terry

Well, right now rates, maybe the easiest way is we usually talk about what are the cash-on-cash yields and I would just say that they have come down somewhat over the course of last year. They still remain in the upper single-digits.

Shawn Collins

Okay, upper single-digit, got you. Okay thank you. And then the second question, I wanted to ask about new boxes purchased this year or boxes manufactured in 2015. You laid this out very well in Slide 31, thank you. It looks like you purchased a large percentage of reefers maybe 60%, 65% or more, which relative to the past is quite high, where you purchased maybe 5% to 20% of most, can you just talk about this dynamic. Obviously these deals were more attractive than standard containers. But do you expect this trend to continue in 2016? Thank you.

Hilliard Terry

Shawn, it was really not by design, in average we purchased, we generally allocate about 20% of a CapEx to reefers. It was just show that we had some carry over dry containers that we bought at the end of 2014. And our appetite for new purchases of dry containers was limited. So it wasn’t really as much a reflection of how many reefers you bought, as we bought fewer dry containers that we normally would. And one other fact that it plays into that is that the dry container prices declined more than refrigerator container prices. So as we spend our CapEx less of it ends up of going for dry containers simply for that reason.

Shawn Collins

Okay, okay understand. Great and then just one last question, I know you mentioned how much of your portfolio expires in 2016. I missed that, if you just give me that number again. And then also, I’m just curious would 2016 so far, have you seen any new deals, new rental renewals or does this activity slowdown with the Chinese New Year?

Phil Brewer

About 8.5% of our long-term lease fleet matures this year, generally – I’m not sure if you are talking about, we’ve seen much in terms of maturing leases already so far this year. Generally, that those negotiations happen later in the year, not by the Chinese New Year. But was that your question?

Shawn Collins

Yes, exactly. If you had been kind of in the market now and talking to parties and what if you had been seeing activity, but it sounds like just the way the portfolio goes and the way business goes, but that is more likely to happen in the second quarter – in the future from now.

Hilliard Terry

That’s generally more second and third quarter event than it is a first quarter event.

Shawn Collins

Okay, that’s what I thought. Great, thank you for the time and the insight I appreciate it.

Hilliard Terry

Thank you.

Phil Brewer

Thanks Shawn.

Operator

And our next question comes from Bob Napoli from William Blair. Bob, please go ahead.

Bob Napoli

Thank you and good morning.

Phil Brewer

Good morning, Bob.

Bob Napoli

First question would be just on what are your – what would be your plans in this environment for CapEx for 2016, can you think about that?

Phil Brewer

Our budgeted – well I mean first I would say our budgeted CapEx is very similar to our CapEx for the prior year. But as Hilliard already noted we are more – we have lower leverage than our public peers. If the market conditions warrant we will certainly increase our CapEx, depending on how we see the returns in the market. But right now our budget is predicting CapEx of pretty similar to what we had last year.

Bob Napoli

Okay and so if the environment stays the way it is today, essentially you will be replacing – I mean your assets will stay above flat on the balance sheet is the intention would be – but your CapEx would deliver, is that right?

Phil Brewer

That’s a fair estimate.

Bob Napoli

Okay. And then I mean the dividend where exact today that – you obviously maintained it for now. I mean if the environment stays the way it is, as today how long would you expect to maintain that dividend?

Hilliard Terry

We give a – like a very thorough analysis of our dividend on every quarter, it’s certainly discussed internally and with our board. I really can’t say anymore than we will do exactly the same next quarter and for every quarter of the year. If we feel it’s appropriate to change our dividend in any direction we will make that change. But currently, based on our strong cash flow, we feel that our dividend level is appropriate.

Bob Napoli

Okay and then, any thoughts on what the merger of TAL and Triton means for the industry and for Textainer?

Hilliard Terry

We said many times that we participate in consolidation ourselves in the past. And that we think further consolidation for the industry would be beneficial. We also look at opportunities to participate in consolidation ourselves. But nonetheless, although this is between TAL and Triton, I believe that – having it two of them consolidated will be positive for the industry.

Bob Napoli

With the impairments when you said, you clearly said do you expect impairments to remain high. Is – I mean assuming we don’t go into some – a deep global recession or the economy, global economy kind – stays – steady at a low rate and prices stay around where they are now. Would you expect those impairments to continue say, through 2017 before they disappeared and do you expect to remain GAAP, understand the cash flow is very strong do you expect to remain GAAP profitable, so two questions there?

Hilliard Terry

Yes. Certainly with respect to the container prices, that will depend very much on new container prices and the level of utilization. It depends on – what happens to the price of steel. Right now, I mean, you asked me through 2017. We’ve all seen in this industry, this industry can change pretty rapidly in a pretty short period of time. It’s pretty difficult for me to project what’s going to happen more than a year from now. Right now, we’re looking at container prices through this year and thinking that it’s – we’re not expecting a dramatic improvement in container prices this year. But it’s very difficult to say what’s going to happen next year.

Phil Brewer

Bob, I think just really the toggle on impairments, really has to do with used container prices. So if they stay at the same level and we have the same amount of containers that are going to disposal for sale. When you may see the impairments continue at this level. If we get any relief on used container prices, then you’ll see that reverse itself fairly, quickly.

Bob Napoli

Then, what are the concerns that investors have is that – the leases, couple of years down the road, your customers are struggling, I mean it’s not, they – it’s tough for them and what is the ability power they would have to come at you to renegotiate leases that are not yet coming off lease like – it seems to be one of the peers that so I mean, one question is if you marked your portfolio to market, the only way we get mark-to-market fundamentally is if your customers were able to renegotiate those leases to what – because of leases have a cash flow attached to them. What is the ability and have you had any pressure and what would cause the ability for your customers?

Hilliard Terry

Well, our customers clearly are on the mission to reduce cost. But we will evaluate customer-by-customer individually, contract-by-contract and if it makes sense to renegotiate contracts earlier and there is a protection for us in regards to a longer-term at – a rate differential between the expired container rate – rental rate and the current market rate, something that’s a win-win situation we would consider it. But we have not seen anything different than I would call business as usual so far. We certainly haven’t seen desperation situations that we’ve had to deal with differently than we’ve done all the other years where we’ve had 5%, 6%, 7%, 8% our fleet expiring on a particular year.

Operator

Thank you. And our final question comes from Michael Webber from Wells Fargo. Michael, please go ahead.

Michael Webber

Hi, good morning guys. How are you?

Hilliard Terry

Hi, Mike. How are you?

Michael Webber

Good. First question for Hilliard, and you kind of addressed it in the last chance. So I just wanted to make sure I’m clear. So I think Hilliard in your remarks you mentioned the inventory up for sale and the mark downs continue at these level. You were reference – you’re not referencing new inventory move to that put on the block and kind of a consistent nominal write-down each quarter, you’re referencing on a per TEU basis, basically, correct?

Hilliard Terry

I’m just referencing overall the container impairments and there is two things that kind of go into that. It’s the number of containers that are being moved there, and it’s the current inventory and where resale prices are relative to the values of those containers.

Phil Brewer

But Mike, maybe I could just jump in because I’m not sure, just only make sure this point is understood, I think it is. But let’s be clear. What we’re talking about is, as I believe you know we have a model that looks at a container when it comes off lease and is – in a certain location it looks at the damage of the container the location, the sale price of the container and other factors. And makes a decision as to whether or not the best financial decision is to sell that container, repair it, keep it on our lease fleet, move it to another location all these variables. When we decide, when the model decides that the best financial decision is to sell that container, if it’s book value at that time is greater than the market price in that location. Then we write down the value of that asset to the market price in that location.

Michael Webber

Yes.

Phil Brewer

We haven’t sold the container yet. And we may not even sell it in that location. We could actually move it somewhere else where we could get a higher price.

Michael Webber

Great.

Phil Brewer

But we feel that this is the most appropriate way to disclose information to our investors.

Michael Webber

No, no that’s helpful only. And I guess the better way for me to ask that question I guess, still here – does that save and imply that you will be moving more containers to be held for sale and that would drive kind of a similar mark down if we don’t get a change in dynamics? They get pretty consistent move a containers to be sold quarter-on-quarter throughout the year basically. Should we looking a better guidance basically around that kind of write down in each quarter?

Phil Brewer

Yes, as I said assuming we have the same volume and the only other incremental comment I would make is for containers that are in failed inventory, those that entire inventory gets revalued as well.

Michael Webber

Okay, all right I can follow-up with one or two. And Phil, you mentioned kind of a comp for this environment being kind of though. I think if you go to, last time I saw prices below 1,500 and I think I asked this some of this is similar I guess last quarter. But if I think about that stretch, that was really the last year of a five year stretch that we saw box prices that are – it’s up 1,500 box. If you go back to the beginning of that period, right, so kind of 1999 to 2000. I guess one is that how would you comp this environment to that environment.

And there are lots of things that you can’t control for like asset deflation and lots of macro variables, but maybe if you look specifically like excess inventory and it’s not big on a global scale. But even just the modest shelf that needs to be burned how would you comp, this market to what we saw in kind of the 1990, 2000 era?

Phil Brewer

Mike, let me answer that question in slightly different way, what we have done has gone – look a container lives for 13 plus years. We are looking at – what happens to this asset over its entire life. And we were looking at the containers we’ve purchased previously when container prices right this level, which is in the timeframe that you just mentioned. And those containers that performed very, very well in our fleet. So we are looking at containers today, at prices that are certainly on a historically at a very, very low level. We believe these containers as they perform over their lives will provide a very attractive return to both Textainer and its investors.

Robert Pedersen

Michael. This is Robert. Can I ask you that, I mean one big difference compared to those years that you referred to is that our fleet utilization has proven to be very, very resilient. When we were seeing prices at that level our utilization was dropping down way down in the 80s and sometimes in the 70s and we are still mid-90s at this stage here. So that’s a huge difference compared to that and that’s obviously the protection we have in remaining term of unexpired leases. And our significant fleet percentage that is covered by a long-term lease and finance lease.

Michael Webber

Sure. And I guess where I’m going with this is the economics on a box from 2002, it’s going to look a lot better than the economics on a box from 1999 are you still at five years of a trough in front of you. So I guess, I’m trying to figure out what’s different between this cycle and last cycle whether it could be short and whether there is anything that structurally within the market that would kind of would drive some degree of support right, that would make that economic profile look for that box, look more or like 2002 and like 1999 or something along those lines?

Phil Brewer

I guess, one or two more, I guess, the only. It’s already touched on the counterparty risk and you guys obviously have a ton of I guess leverage in that scenario around been forcing the contracts. But specifically we’ve seen HMM come out recently and talk about, meeting the restructure and they’re going back and looking for 30% cut from their container ship counterparties. I’m curious, whether you guys have had a dialogue there and maybe if you can give us some color on what your exposure is and whether – extend is in play for at least the ships, and then just curious as to how maybe, how you think about that scenario specifically with HMM?

Hilliard Terry

Well, you obviously identified HMM, I mean – in the past earnings calls we’ve talked about Hongsheng [ph] as well, clearly both of the Korean less orders are facing a challenging situation currently, Hongsheng [ph] seem to have improved and reduce its leverage much more significantly than Hyundai has. It’s a situation that we’re continuing to monitor our office in Korea in constant discussion with staff from Hyundai. We look at our on lease position and make decisions as well about whether we should or should not lease additional equipment to Hyundai. I can’t say much more than that, it is a situation that we’re monitoring very closely.

Michael Webber

Fair enough, just one or two more and it’s actually is simplistic. But you guys in the past got referenced used containers pricing as a percentage of the new pricing. Where would you put that figure right now?

Hilliard Terry

On a historical basis it’s actually still very similar to where it’s been. I mean if you look at, we look at used container prices and say that they’re low. But if you look at them they’re relative to new container prices, it’s actually consistent with what we’ve seen historically. So that metric hasn’t changed much as if the new container prices have declined so much.

Michael Webber

Okay. All right. That’s helpful. And then one more and I’ll turn it over for Hilliard. Maybe the more broadly, I think you mentioned your effective interest rates actually down year-on-year. And just curious, what are you hearing from lenders right now, and I don’t think we’ve seen an ABS deal yet this year. But just curious as to whether you think the mix shifts a bit in 2016 and then whether you are seeing on the margin, either with yourselves or within the space. Advance ratio is coming down a touch, or just maybe any sort of incremental color kind of the date through Q1 on what you guys are seeing there?

Phil Brewer

Sure, Mike. There was an ABS deal that was completed recently. And it was a deal that was out in the market previously….

Michael Webber

Okay

Phil Brewer

I think if you look at the terms that – they ultimately got the advance rate had to be reduced and clearly the pricing of the deal was much higher than what they had gone out with previously. As you know, I believe that you should see more differentiation between folks like ourselves and some of the smaller and mid-tier players and frankly the ABS market has not really – should have showed much difference between the two. But I think, as time goes on, I think you maybe see more differentiation going forward. And with respect to, I think the bank markets, I think the lenders are paying close attention to what’s going on in the market and monitoring things closely. But I like the position as to where we are, I think with respect to what we’ve been able to do in this market.

Michael Webber

Okay. All right. Thanks for the time guys, I appreciate it.

Phil Brewer

Thank you, Mike. Appreciate your joining.

Operator

Thank you. This concludes the question-and-answer session. I’ll now turn the call back over to Hilliard Terry for closing remarks.

Hilliard Terry

Katie, thank you very much. And I want to thank everyone for joining us on this call. If you have further questions or would like to talk to any of us, we are around and feel free to give us a ring. Thank you and we will speak with you soon.

Operator

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

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