Seaspan's (SSW) CEO Gerry Wang on Q1 2016 Results - Earnings Call Transcript

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Seaspan Corporation (NYSE:SSW)

Q1 2016 Earnings Conference Call

April 26, 2016, 09:30 AM ET

Executives

Gerry Wang - Chief Executive Officer, Co-Chairman and Co-Founder

Mark Chu - Interim Chief Financial Officer and Vice President, Corporate Development and General Counsel

David Spivak - Chief Financial Officer

Analysts

Ken Hoexter - Bank of America

Donald McLee - Wells Fargo

Ben Nolan - Stifel

Amit Mehrotra - Deutsche Bank

Noah Parquette - JPMorgan

Joe Nelson - Credit Suisse

Brandon Oglenski - Barclays

Chris Wetherbee - Citi

Operator

Welcome to the Seaspan Corporation conference call to discuss the financial results for the quarter ended March 31, 2016. Hosting the call today is Gerry Wang, Chief Executive Officer, Co-Chairman and Co-Founder of Seaspan Corporation; and Mark Chu, Interim Chief Financial Officer and General Counsel 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 Mark Chu.

Mark Chu

Good morning, everyone, and thank you for joining us today.

Before we begin, I'd like to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by these forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the first quarter 2016's earnings release and in earnings webcast presentation slides available on our website at www.seaspancorp.com as well as in our recently filed Annual Report on Form 20-F for the year ended December 31, 2015.

During this call, we will discuss certain non-GAAP financial measures, including adjusted EBITDA, cash available for distribution to common shareholders, normalized net earnings and normalized earnings per share. For definitions of such non-GAAP financial measures and for reconciliations of such measures to the most closely comparable U.S. GAAP measures, please refer to our earnings release.

I'll now pass the call over to Gerry, who will discuss our first quarter highlights as well as some recent developments.

Gerry Wang

Thanks, Mark, good morning to everybody. Please turn to Slide 3 and 4 of the webcast presentation. In Q1, we're able to deliver on our key initiatives, and I would like to highlight four points.

First, delivering on growth strategy. During Q1 we continued to grow our fleet. We took delivery of our ninth SAVER design 10,000 TEU containership, the MOL Benefactor, which began an eight-year-plus fixed rate time charter with MOL. We increased our owned and managed fleet to 101 vessels, consisting of over 740,000 TEU, enhancing our position as the world's largest containership lessor. Our newbuilding program has been proceeding smoothly at all three shipyards, YZJ, HHIC and CSBC. We ended the quarter with 17 vessels under construction for Seaspan and GCI.

Second, stability of operations. We continued to showcase our stable operating platform by achieving 97.2% utilization for the quarter or 98.3% excluding scheduled off-hire. Third, effective cost control program. The implementation of our cost control and efficiency program is outperforming our expectations and helping to keep down our expenses.

Fourth, financial execution. We enhanced our capital structure by continuing to access financings from our global syndicate of lenders. As a result, in Q1 2016 we improved our key financial metrics compared with Q1, 2015. 14.3% increase in revenue, 6.2% increase in adjusted EBITDA, 7.1% increase in cash available for distribution to common shareholders and 32% increase in normalized earnings per share.

We are very pleased to have recently announced that we have added Mr. David Spivak as our new Chief Financial Officer. David will be joining us beginning May 2. He has a wealth of capital markets experience and has been involved with the company since our IPO in 2005. We also want to thank Mark Chu for his leadership as Interim-CFO during this transition period.

David is here with us today, and I would like to pass it over to him for a brief comment. David, please?

David Spivak

Thanks, Gerry. I am very excited about joining Seaspan. I've known the company for a long time. Have great respect for the business and the management team. I am looking forward to meeting with the analyst community and investors. I will be relocating to Vancouver from Toronto. My official start date, as Gerry mentioned, is next week, and I will always try to make myself available for any questions, once I get settled. Thanks.

Gerry Wang

Thanks, David. Welcome aboard. As we progress during 2016, we are continuing to focus on our four key initiatives: number one, maintaining our reputation as a leading operator through operational excellence; number two, executing our cost control and efficiency program; number three, continue to take advantage of attractive growth opportunities in the market; and number four, continuing to access global financial markets.

I will now turn the call over to Mark, to discuss our Q1 results. Mark, please?

Mark Chu

Thanks, Gerry. Whatever on, please turn to Slide 5, and where I'll discuss the results for the quarter ended March 31, 2016, compared to the first quarter of 2015.

In this quarter, revenue increased by $27 million or approximately 14%. This is due to the delivery of eight vessels in 2015 and one additional operating day in quarter one 2016, due to the leap year. This is partially offset by lower charter rates for vessels, which were on short-term charters and an increase in off-hire. Our vessel utilization for the quarter was approximately 97% compared to approximately 99% in the prior year.

During Q1 2016, we completed nine dry dockings with 75 days of off-hire, an increase of 26 days from the prior year as well as 128 days of unscheduled off-hire, an increase of 107 days from the prior year. This is due to vessels coming of long-term charter and entering the spot market.

Ship operating expenses were approximately $48 million, a $3 million or approximate 7% increase from the prior quarter. This is primarily due to a 12% increase in ownership days during quarter one 2016. G&A expenses were $7.8 million, representing approximately $1 million increase from the prior quarter. This is due to primarily professional expenses and other miscellaneous expenses we incurred during this quarter.

Our operating lease expense was $14.9 million in Q1 2016, representing an $8.7 million increase from the prior quarter. This is due to additional operating lease financings on four vessels delivered during 2015 and a bit by the financing of the MOL Benefactor through an operating lease and the MOL Benefactor delivered at the end of this quarter. Our operating lease expense may increase overtime, if we continue to finance additional vessels using similar type leases.

Moving on to adjusted EBITDA and cash available for distribution to common shareholders. In Q2 2015 we revised our non-GAAP presentation of certain vessel lease financing arrangements to recognize the gain on sale being the access of our financing proceeds over the cost of vessel immediately into our non-GAAP metrics of adjusted EBITDA and cash available for distribution to common shareholders. We revised our historical comparative measures accordingly.

Taking that into account, adjusted EBITDA for the first quarter of 2016 was approximately $164 million, representing a 6.2% increase from the prior year. Cash available for distribution for the first quarter of 2016 was $100.5 million, representing a 7.1% increase. These increases were primarily attributable to delivery of eight newbuild vessels.

Earnings per share. Normalized net earnings for the quarter increased by $7.6 million or approximately 20%. Normalized EPS was $0.33 compared to $0.25 in quarter one 2015, a 32% increase. This increase is due to strong earnings contributions from our eight newbuild vessels delivered in 2015, the effectiveness of our cost control measures and the impact of our share repurchases.

We expect quarterly EPS to continue to be higher than the prior year due to the full year impact of the 2015 deliveries and the three vessels scheduled for delivery during 2016, including the MOL Benefactor delivered at the end of Q1. Turning on to dividends, our Board declared a dividend of $0.3750 per common share relating to the first quarter of 2016.

Would you please turn to Slide 6 for our balance sheet information? Our total assets increased by approximately $27 million from December 2015 to March 31, 2016. This is primarily due to an increase in liquidity, generated from our financing arrangements, partially offset by a decrease to our operating assets due to normal depreciation.

Our total liabilities increased by approximately $74 million since December 31, 2015. This was primarily due to the drawdown of a term loan to finance one 10,000 TEU vessel, a $65 million drawdown from our revolving credit facility, partially offset by a regularly scheduled debt repayment. During Q1 2016, we repurchased 8.3 million of our common shares under our share repurchase plan.

Looking forward, would you please turn to Slide 7 for forward guidance for the current quarter. We do not intend to update our quarterly guidance in the ordinary course with communications.

For quarter two 2016, we expect each of our revenue, ship OpEx, operating lease expense, depreciation and amortization and G&A expense to remain relatively consistent with our Q1 2016 results, as only one new ship is planned to deliver and that delivery will occur in mid quarter two 2016. Taking this into account, we expect our EPS to rage from $0.27 to $0.32 per share. Please note, these amounts are based on current information, estimates and are subject to change.

Would you please turn to Slide 8 for our latest forward guidance, with details of expected vessel deliveries, dividends, CapEx and dry docking, including the delivery of two vessels over the remainder of 2016, one 14,000 TEU will be delivered in Q2 to be chartered to Yang Ming and one 10,000 TEU will be delivered in Q3 to be chartered to Maersk.

We will have six vessels delivering in 2017, one of which is a 14,000 TEU to be chartered to Yang Ming. Three 11,000 TEUs to be chartered to MSC and two 10,000 TEU for which we are currently seeking charters. We do have some flexibility on the delivery date of the two 10,000 TEU unchartered vessels. Again, each of these items is based on current information, estimates and remain subject to change.

Would you please now turn to Slide 9 for details of our eight ship order book, representing over 90,000 TEUs with information on customer, shipyard, delivery dates, size, chartering as well as the allocation of ships to GCI. We have made significant progress since the beginning of the year towards financing and mainly over the CapEx for our newbuild vessels. We have secured financing in place to finance our 2016 vessel CapEx of approximately $165 million.

In regards to 2017, we're in the final documentation stages for over $250 million of secured financing for the approximately $400 million CapEx for that year. While committed financing is in place for the majority of our CapEx, we continue to seek secured financing to fund the remainder, which we expect to achieve on good terms and at a favorable cost.

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

Gerry Wang

Please turn to Slide 10, where I will briefly discuss the industry. Fleet rate remain at historically low levels on all key trade lands and the market remains challenging for certain carriers, driven by continued expansion of the global fleet and lower than anticipated demand.

On the supply side, we expect tonnage growth of about 4% for the year 2016 and around 6% for the year 2017. Major operators continue to manage supply through scrubbing, redeployment, slow steaming and idling of ships. Year-to-date, we have seen 37 vessels, representing 138 times 500 TEUs sold for scrub, and we expect scrubbing level to remain elevated throughout the year. The total order book remains low at approximately 19% of effective loading capacity or about 6% per annum on an average.

On the demand side, we expect global containership volumes measured in TEUs to grow modestly by around 2% to 4% in 2016 and 2% to 3% in 2017. Overall, we expect market conditions to gradually return to more balanced levels overtime. However, the industry would like to remain challenging during the year '16.

Finally, we expect the outsourcing trends by liner companies to continue as demonstrated over previous cycles. Given that we are the leader in the space that we continue to maintain our strong customer relationships, we expect to continue to capture a substantial share of the growth opportunities in our industry.

Please turn to Slide 11. This chart shows the staggered maturity profile of our charter portfolio. For the remainder of the year '16, we expect to take delivery of two 14,000 TEU vessels and one 10,000 TEU vessel. In 2017, we expect to take delivery of three 11,000 TEU vessels and two 10,000 TEU vessels. All of those future deliveries will present TEU growth of roughly 15% of our current fleet capacity, excluding vessels we manage for third-parties. The average remaining charter length of our operating fleet is approximately five years on a TEU weighted average basis.

For the year 2016, we have 13 vessels up for re-charter, which represent approximately 2% to 3% of estimated 2016 revenue and in 2017 a further 13 vessels up for re-charter. On the past 12 months, we have a seen weakness in charter rates for Panamax vessels. With increased global uncertainty, we'll continue to monitor market conditions to determining the best strategy for those vessels.

Now, I'll move on to CEO's vision, please turn to Slide 12, where I would reiterate a vision for the future. We believe Seaspan is well-positioned to continue to enhance its leadership position and create shareholder value over the long-term. We'll continue to pursue fleet growth with a 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, owning and chartering large modern fuel-efficient containerships to creditworthy customers. Critical to our success will be maintaining our reputation as a leading operator through excellence and efficiency, while closely monitoring our costs. We have a history of returning capital to shareholders and we remain committed to increasing shareholder value over the long-term, as we continue to opportunistically grow our business.

As a ship leasing franchise, we consider it to be critical to consistently maintain a strong balance sheet, diversifying our capital structure and enhancing our financial strength, including maintaining appropriate leverage, will remain our top priorities. Overall, we believe we are well-positioned to manage through current market conditions that our strong base of cash flows from existing charters as well as future growth will enable our franchise to become stronger for the long-term value of our shareholders.

Now, please open the call for questions, operator. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Ken Hoexter with Bank of America.

Ken Hoexter

Can you just maybe talk a lot of change going on lately about with the alliances and your thoughts on what that means for kind of growth going forward? Does it mean you're going to see fewer line or company is actually wanting the larger vessels, given that you're going to have strengthening alliances with fewer needs or do you see that as a bigger opportunities, as now you get a lot of shifting, different alliances are going to have different needs than what they might have had before? Maybe can you just talk a little bit about that?

Gerry Wang

The alliances are going through a lot of reforms, as we discussed last time during the call and also during my visit to New York. And now we see some clear patterns being developed that we see a new alliance called, Ocean, being formed with COSCO, China Shipping, Evergreen and OOCL. What is unclear is what happens to the old G6, less MOL and OOCL, and the CK less Evergreen and the COSCO. So the process is still ongoing. And by the end of the year, the situation will be very clear. That's the first observation.

Second point I want to make, Ken, is I think this trend is very clear. It becomes a bigger consortium come into play. When I say bigger, I also mean the size of the ships getting bigger, because you look at those major alliances they are focused on bigger ships and modern ships. That points out towards the growth, because the industry has a lot of old vessels dealt in the 80s and 90s event and early 20s. So I see modernization program will continue, especially with the strength of those alliances and they're getting bigger, their desire to drive down costs per TEU will continue to be stronger, given the market conditions. Sometimes I use expression.

The operators will have to deal with this low-freight rate environment for some time. The only way to make money and survive through that low-freight rates environment is to make sure you drive down your own cost, driving down the cost per TEU. That trend I see that as being developed, as been a firm-up, and I see actually more opportunities ahead of us.

Generally speaking, consolidation brings about opportunities. As we pointed out, those new operators in new alliances will seek to make sure their fleet can match with each other, the earnings opportunities for us. We will have received cost already from potential operators and charters, if you talk about the new requirement, taken advantage of the low-interest cost and also very competitive newbuilding prices. So we are excited about the consolidation and industry development.

Ken Hoexter

And if I can just follow-up on your comments on the Panamax weakness. As we prepare for the Panama Canal to open in a few weeks, has any ship owner approached you about maybe increasing their positioning of the lower scale of vessels in that 10,000 to 12,000 range or can you talk about other discussions that have gone more recently or just given the excess capacity have new discussions kind of stayed on the sideline?

Gerry Wang

Panama Canal will be open in June, officially. Seaspan has been invited to represent ourselves at the opening ceremony. Our Vice Chair, Mr. Peter Shaerf and his wife will represent us at the grand opening. This is a remarkable event. The new Panama Canal can accommodate Seaspan's several designs of 10,000 TEUs and 14,000 TEUs as well.

What is happening right now, we have had request from our existing charters to send our 10,000 TEUs as well as the 8,500 TEUs through new Panama Canal to U.S. East Coast. So the new Panamax size will really be defined by 10,000 TEU to 14,000 TEUs. So that's the new paradigm.

As far as the smaller, the old Panamax vessels are concerned, we're going through a cascade stage of the adjustments. We're seeing more 4050s being deployed into Asia trades and Asia to South Africa and Asia to Australia and New Zealand. And we've also seen more 14,000 TEU coming through Trans-Pacific trades, away from Asia, Europe trades. So things are changing there quite fast and most operators are really paying a lot of attention to the new Panama Canal for the direct traffic -- through traffic to U.S. East Coast.

As I made remark last month, East Coast, the conditions remain under pressure in terms of receiving larger vessels and the increased cargo volume, the infrastructure, the port facilities will have a challenging time to deal with those new arrivals.

Ken Hoexter

And Gerry, just a quick one for Mark. I just wanted to catch on the outlook. Did you build in additional share repurchases within that outlook for the quarters going forward or was that just on results given the addition of the vessel?

Mark Chu

That was just on results given the addition of the vessels. Traditionally our forward looking does not -- we don't take into account our opportunistic share repurchases.

Operator

And our next question comes from the line of Donald McLee with Wells Fargo.

Donald McLee

This is Donald on for Mike. The first question is, last quarter you mentioned that Seaspan was examining their strategic options around the JV. And I was just wondering how those options changed with regards to the ROFR expiring at the end of Q1? Was the ROFR simply extended or does the expiration changed the likelihood of any potential deal?

Mark Chu

Well, I don't know. It's Mark, I will answer that. You are correct the ROFR did expire on March 31, 2016. And there has been no extension of that agreement, that's just the natural termination date. We continue to be in discussions with our partners and GCI over the next steps from a strategic standpoint and discussions are ongoing. And when we do have something to disclose, of course we will disclose it. At this point in time, we don't have anything to speak about.

Donald McLee

That is fine. One follow-up question to that though is it looks like the GCI loan actually increased during the quarter. Previously it was talked to as a source of cash as opposed to a use. So I was wondering what drove the increase there.

David Spivak

Our financing arrangements with GCI to the extent we have excess liquidity, we agreed to lend it to GCI to help support some of the shipbuilding installment payments. That loan is fully secured by the time charters, free fund guarantees and shipbuilding contracts. So this is just temporary liquidity coming up and down, Donald, that it's not really a source of funds as we look at it, because the loan is callable on 45-days. And with our financings we did in Q1 2016, financing of the 10,000 TEU and the financing the MOL Benefactor, we did have excess funds on hand. So it's merely again consistently with the past short-term placement of funds.

Donald McLee

Around your order book you mentioned that Seaspan has some flexibility for the unchartered newbuilds. How far out could those deliveries be extended?

Gerry Wang

Our shipyard has been very cooperative. We have very good relationships with our preferred shipbuilders, YZJ, Hyundai, CSBC and Hanjin Heavy. We have tremendous flexibilities in terms of delivery date. We can push the ships to 18 if needed. Again, we're talking with our charters and our potential charters about the delivery schedule. And I just want to assure you, we'll have tremendous support from shipbuilder partners.

Donald McLee

And then one quick follow-up that. So it looks like one of your 14,000 TEU Yang Ming vessels were delayed from Q3 to 2017? What was a rationale there?

Mark Chu

Well, again, that reflects the spreads between ourselves and the shipbuilder in accommodating the delivery requirement of our charter of Yang Ming lines. For their scheduling, the alliance partnership deployment programs, they would only need the ship for Q1, Q2 coming '17. We've had good discussions with the shipbuilder. We are able to accommodate that.

Donald McLee

And then my last question, I'll turn it over. Then my last question and I will turn it over. Given the balance sheet concern around the South Korean lines with HHM and Hanjin looking to potentially renegotiate charters, how would any charter breached by Hanjin impact -- would there be any triggers for mandatory debt repayments for Seaspan or anything like that?

Gerry Wang

I'll take that one. So we don't anticipate having any charter breaches. Hanjin continues to make regular charter high repayments to us. And I don't think in our history we've ever had a charter breach. In our debt agreements, there are the usual and typical clauses, but to the extent that the charter terminates for some particular reason, we do have grace periods, fairly generous grace periods to redeploy the vessel with other charters, before an acceleration of that would occur.

Donald McLee

And just a follow-up, I don't know if this is too specific but how long are those grace periods typically?

Gerry Wang

I think they typically run from about almost half a year, if not an excess of that.

Operator

And our next question comes from the line of Ben Nolan with Stifel.

Ben Nolan

So sort of in keeping with that last question and I don't want to dwell on Hanjin or anything, but when you guys look at your dividend policy going forward and ultimately the four pillars that you talked about there, one of those was not dividend, how do you think about maybe safeguarding the balance sheet? How high up the list of potential options for liquidity would you say the dividend would be in terms of potential sources of liquidity if necessary?

Gerry Wang

Every year, we as a company set our dividend policy by reference to our expected operating results for the year. We look our sources liquidity and we balance the interest of the safety of the company with the desire to return capital to our shareholders. We revisit that on a consistent basis each and every quarter at the Board and regularly with the management team. So our policy in regards to dividend has remained -- our process in regard to dividends I should say has remained unchanged and we continue to monitor.

Ben Nolan

So maybe stepping back a bit or more slightly connected, obviously, you guys were able to get the operating lease done in this quarter and it sounds like you're in discussions for funding of the remainder of the CapEx going forward. But one of the things that we've heard in the market lately is just that the availability of bank finance in particular has really tightened since the first three year. I'm curious if that's something that you're seeing, and if at all that works into how you're thinking about the market going forward or not? I mean, has there not been any change in the appetite for bank debt?

David Spivak

Sure, Ben. So I think that looking at bank financing, and I can only comment from our experiences is that it continues to be robust. We continue to have access. I think that taking on -- looking at our financing history, we finance with banks and other lenders and financiers in all of the major geographic regions, North America, Europe and Asia and those relationships are then cultivated for a decent length of time.

So I think that's paying dividends for us. And we continue to have good access to capital on a global basis. So we feel very comfortable with our access. I do appreciate some of your comments, where you're coming from, but from us we've been consistently would execute on financing on the secured financing side and debt side amongst other sides and we continue to be comfortable and continue to execute.

Ben Nolan

And then lastly for me getting back to one of the things that you are talking about with respect to Panama Canal and interest from some of your customers to utilize some of the 10,000 TEU vessels as the new Panamax class ship -- is there, it's hard to really get fixture data on assets of that size. We have seen 7000, 8000 TEU contracts done, short-term contracts, sub $10,000 a day. I am just curious if in fact demand for that larger ship class is materially higher, is there a big delta between sort of what a charter rate and charter appetite is for a 7000 or 8000 TEU vessel versus a 10,000, 11,000, 12,000 type category?

Gerry Wang

Well, my take on the thing here is that you look at Seaspan's fleet composition we don't have anything sort of the 6,000 TEU to 7,000 TEU. We call them the transitional type. For the new Panama Canal, you will see some smaller vessels being utilized, not because of particularly the charter rate, but more because of the, I call it, the trial period. The operators don't know how the cargo volume will show up. As I said, they don't know what they will expect to encounter on the East Coast parts. I've heard many comments about the conditions on the U.S. East Coast, the port conditions, the logistical network, so probably that's the main driver behind.

On the other side, if you really look at the composition of the operating cost for the container operators, the charter cost or the ship cost accounts for anywhere between 10% to 20% depending on the vessel side, so charter cost is not really a material consideration, whereas the fuel cost, loading cost, the box rates, IT, cargo canvassing and all the other cost are more relevant in aggregate. I think then operators look at trying to put their hands on a new trade route by using the smaller vessels just to test out, I think that's the main consideration to be honest.

Ben Nolan

One real quick one lastly, I have forgotten. Did I missed it or did you guys say in your question or in Donald's question earlier whether or not you guys have had any discussions at all with Hanjin?

Gerry Wang

We have not received any request for anything related to the charter party discussion, that we full expect our charters to perform according to the charter parties. Whatever challenges at the ownership side, it's really beyond our control, but generally speaking, I see consolidation is happening and also I see more national governments getting involved. If you look at what's happening in China between COSCO and China Shipping, the two entities have been consolidated in order to produce a larger and a more competitive operator in the marketplace.

The circle is back to my comment about the trend. My first question, the answer to you, I can't remark on the trend of the industry. The alliances are getting bigger. The ships they use they're getting bigger. The whole purpose is really to become more competitive i.e. driving down cost per TEU full larger vessels through modernization of new vessels like our SAVER design vessels.

So this kind of natural replacement will continue on. That produces opportunity for us in terms of growth and demand for larger, modern vessels like the 10,000 TEU and 14,000 TEU. So we feel very comfortable with the growth opportunities that will be available to us in the future. Once the alliances -- the formation is started out.

Operator

And our next question comes from the line of Amit Mehrotra with Deutsche Bank.

Amit Mehrotra

Just want to understand -- I have a few questions. Just the first one is, wanted to understand the EBITDA puts and takes this year and next. You have a good amount of growth from vessels that you took delivery sort of middle of last year that will have an overlap effect and further deliveries this year and next. And so just trying to understand net of roll-offs, assuming the roll-offs sort of are recontracted at today's rates, is the expectation still that the EBITDA of the company grows this year and next both on a year-over-year basis?

Mark Chu

I think we've given our next quarterly forecast over those numbers and our financial projections for the next quarter. I think you can read into those numbers, the effect of our newbuild deliveries and we factored in vessels coming in the spot. So we can't give some visibility though. We can go out of quarter and I think we have published those to go beyond the scope of what we regularly report on a forward basis.

Amit Mehrotra

Maybe I can just ask then on the opposite end of the ledger in terms of cash calls, because I guess you have more visibility there. I'm just trying to understand the cash cost with the company is you have about $190 million or so million of interest, you got $200 million of debt amortization and then other couple of hundred million of preferred to common dividend, so I guess that roles up to like about $600 million a year. Is that how you think about sort of your annual cash costs on an operating basis side from many symmetrical cash costs which should my questions about?

Gerry Wang

So what we do as we run our treasury management program and our forecasting program, we take into account all of the items you spoke about and as well as we look into our financing sources and needs we build that into, fairly comprehensive program into which we dovetail our dividend policy. So you're correct, those are all items we take into account.

Amit Mehrotra

But the question is on the 20-For, I think the debt amortization was sort of earmarked at like $290 million and I guess I had sort of expected more of a $200 million run rate. Is that going to step up this year or there are going to be sort of refinancings that are going to be that closer to $200 million?

Gerry Wang

On net basis, I think what we laid out in our 20-F is our contractual obligations and it doesn't take into account in our contractual obligations, of course, our any financing or refinancing proceeds, because that just merely speaks for a contractual obligations. As I sort of repeated before, when we look at our cash management program, we take into account our entire financing sources and uses, including our short-term liquidity and items such as our revolver to smooth out temporary cash flow differences to bridge CapEx, from the expenditure dates to the delivery dates or income-producing assets. So once again it's sort of hard to speak about finite things, because we're getting into forward projected amounts, but as part of our process we do take this all into account.

Amit Mehrotra

Maybe ask a couple of quick ones. On the Series C preferred, and I joined late, so apologize if you covered this, but that I guess $330 million cash call in January of next year, you guys have a good amount of existing liquidity. And I just wanted to know if you could sort of help us in terms of how you expect to address that, whether it's existing liquidity, refinancing or maybe even probably a combination of both, if you can provide some color there?

David Spivak

I think if you look at our existing liquidity, and if you take our March 31 statements as a starting point, we have approximately $250 million of cash and cash equivalents on hand. And in addition we have the loan to our affiliate GCI of approximately $230 million. And that loan is callable on 45 days notice and backed by securitized assets now and the contractual obligations of our partners to deliver capital on a capital call. So we feel very comfortable with the value of those assets we have on hand, close to $0.5 billion of liquidity.

Our obligations to, I'll refer to it as an obligation to redeem our Series C apparently sits at $330 million. So we feel comfortable that if we chose to do so, we could deal with our Series C repayment obligations and other obligations as they come due. That said our contractual right to call on the Series C at $25 as it exists today, we can do that today, and into the future dividend step-up day first occurs in January, end of January 2017. So we have plenty of time to deal with that call rate.

One of the things you've seen is our stock prices fluctuate in the Series C up and around and sometimes below the $25 value. So to that extent, we are examining the best use of our capital considering our CapEx program and other things we have in the go, in addition to the stock fluctuation and prices and the fact we have a contractual call rate at $25, and other opportunistic uses of our capital, so in a cost assessment mode.

Amit Mehrotra

You mentioned GCI in the loan there and I know you have 45, it's a little hard to understand what the cash balances at GCI. And so maybe you can give it to us, if you have it or if you can't, could you provide us some insight in terms of do you expect the loan balance at GCI to actually start decreasing in the second, third, fourth quarter as move through the year?

Mark Chu

Well, that's absolutely correct. The loan balance is actually is constructed, because the amounts we advanced relate to shipbuilding installments. So their ships start to deliver and I think we have some disclosure on materials, but the delivery dates, the secured financing gets put into place and our loan gets repaid either from earnings from other ships or capital calls.

So in terms of what's backing that loan, we do have the entire earnings and free cash flow available after their debt, secured debt service of GCI as well as the contractual obligations for the various parties including the Carlyle funds, and the Washington Family to produce the capital when called. So we feel very comfortable about our ability to turn that loan into cash maybe to point in time and the 45-days is merely due to allow us -- GCI sufficient time to make capital calls in due and ordinary course. So that said, we've view it as a very liquid available asset to us.

Amit Mehrotra

Gerry, I don't mean to ignore. I was just going to ask you one higher level question, if I may. And it was on Hanjin and it's a very small piece of your portfolio, Seaspan's portfolio, I mean I think three ships, which is obviously relatively small. But the question was really, it seems like it's a much bigger piece for GCI four ships out of I think my own math is like 20% of the annual EBITDA on a fully delivered basis potentially. And so just wanted to understand how you think the developments in Korea could impact your view on the attractiveness of strategic options at GCI?

Gerry Wang

Well, as I said, the strategic discussion with the GCI is still going on. As Mark commented before it is done, we have nothing to enhance. We are always interested in the assets type of vessels we have collectively developed and built. And Hanjin and Hyundai Merchant Marine, a very important shipping lines for Korea. Korea as a steady nation, I have no doubt. There was considerable significance of maintaining the national carrier spellers. I cannot comment on the structural changes in terms of ownership, that's really beyond our scope of coverage.

As far as we are concerned the contracts are performing well. The charter hire payments are being made to us regularly. We full expect them to perform the charter parties in accordance with what we have with them. And we treasure the relationships with them and we have enjoyed great working relationships with Hanjin Shipping. As far as Seaspan is concerned, as you have pointed out correctly, the three ship exposure to us is fairly small and can be well managed. So we don't have a material concern in that regard.

Operator

And our next question comes from the line of Noah Parquette with JPMorgan.

Noah Parquette

Most of the questions have been answered. I just wanted to ask about the sale lease back transactions. Obviously, you've been doing a number of those. Can you talk a little bit about how deep that market is and what your appetite is for future sale lease back?

Mark Chu

So the market for us remains deep for that type of financing. And it's very favorable financing to us in terms of the advanced ratio in both our financing cost, both from a coupon perspective and a cash flow perspective. So I think that on a go-forward basis, as we sort of mentioned, I think you should expect to see some us consummate some more of those transactions. And I think you should expect to see an increase in operating lease expense as we continue to consummate those transactions.

Noah Parquette

And then just a follow-up on Amit's question about the GCI loans. I mean I understand how the wind down would work as the newbuilds are delivered. But in terms of the 45-day kind of callability, how would it work if you just call those loans today? I mean, since they are newbuild installments, where would the liquidity come from GCI's perspective?

Gerry Wang

So if we call those today, Noah, then GCI itself would go to its members, the Washington Family, the Carlyle fund, including us and they would make capital call. We're required to produce the cash in a period of time inside the 45 days. They would receive the money and they pay us back.

Noah Parquette

And then just finally just a broader industry question, you talked a little bit about the 10,000 TEU ships going through -- the demand going through the new Panama Canal. When you talked about your charters and I guess your concern, how capable is the infrastructure on the East Coast ports for handling this new traffic right now? We have heard that there is some limited capacity there. How comfortable are your customers and you for that?

Gerry Wang

Yes, we've been talking with the two, three of our charters at least for sending our ships through new Panama Canal to U.S. East Coast. Obviously, before we send the ships to the new destinations our operational team will have to evaluate all the parameters that would affect the operations of the ships including the terminals, the channels, the infrastructure and the logistic connecting network so and so forth.

Generally speaking, there is a lot of the interest from the U.S. East Coast to receive those big vessels, but whether or not the whole transition can be smooth or not well will very much depend on the readiness of the infrastructure and the system in place. There are some doubts expressed by the operators as to the readiness, but we will remain an open minded for what to be seen.

But one thing is for sure, some operators are more conservative than the others. For example, they're sending smaller vessels, the 10,000 TEU, 8,000 TEUs to U.S. East Coast through new Panama Canal just to see how things would work. So it is a question mark, literally raised by every operator to me when I speak to them and we're just as curious as anybody else.

Noah Parquette

And I apologize if it is too specific but are there certain ports that are ready now and then some ports -- which if there are a couple of port you would say are ready to go now and a couple of ports that have a while to go and would you say the limiting factor is demand or the infrastructure?

Gerry Wang

It is related to the infrastructure including bridge. There is a bridge called a Bayonne Bridge, which was supposed to be lifted up and modified to allow for bigger vessels to through. As you probably know very well from living in that area, that bridge, to my understanding is wouldn't be open till next year. Original plan would be to match the new opening of the new Panama Canal, so that wouldn't happen. New Panama Canal obviously was delayed, but the Bayonne Bridge uplifting work has been the further delayed.

So that is the one situation. There are other things that also happening, producing restrictions to the operators for sending bigger ships, especially 13000, 14,000 TEUs on to the U.S. East Coast parts.

Operator

And our next question comes from the line of Gregory Lewis with Credit Suisse.

Joe Nelson

This is Joe Nelson on for Gregg Lewis. I know we're bumping up on an hour, so I'll make this a couple of quick ones from me. Getting back to the two uncontracted newbuilds, given everything we're seeing with the shake ups and the alliances, is it safe to think here that you probably need a little bit more visibility on how these alliances shake out before we get some visibility as to who and to what the contract terms are.

Gerry Wang

100% correct. And a matter of fact, we have been in numerous discussions with the operators. Given the unclear situation vis-à-vis the new alliances, the formation, the interest have been more for the short-term charters, but our pursuit has always been for long-term charters. And my feeling is until the picture is clear about the new alliances, the charter interest for long-term, assets like ours will remain limited, but sometime, we have great relationships with shipbuilder YZJ and other shipbuilders, we have assurance from our shipbuilder to be able to defer the deliver literally at any time when we want. That is a huge plus. It gives us all the flexibility when we talk to our potential charters about the long-term charter coverage we speak for.

Joe Nelson

And then just one kind of follow-up, and then I guess, kind of getting back to sale-leaseback financing under the assumption that you are able to fix those two on contracted newbuilds on longer-term charters, is that something that would also be kind of an asset we should be thinking that would be available for sale and lease back type transaction?

Gerry Wang

Yes. And also one thing I want to add there. For the unchartered vessels due to our strong relationships with the shipbuilders, we are also able to change the designs from the 10,000 TEUs to other sizes if we want depending on the charter interest, for example, we are in close discussions with YZJ about the potential 14,000 TEUs. We have once in our mind is to potentially convert one or two the 10,000 TEUs into 14,000 TEUs. In addition to the delivery date flexibility, we also have the flexibility on converting from the 10,000 TEU to other sizes we need according to the charter coverage discussions.

Operator

And our next question comes from the line of Brandon Oglenski with Barclays.

Brandon Oglenski

Thanks for getting us in here at the back of the queue. So real quick, on GCI, can you guys update us what is secured on the financing side for those deliveries the next two years?

Gerry Wang

Mark, can you?

Mark Chu

On the GCI side, I should probably consult -- I mean for the vessel deliveries?

Brandon Oglenski

Right. Is there financing in place for those deliveries in the next two years?

Mark Chu

I have to recall, because this is our affiliate, not us. So I have to think about the last report I recorded. I think that all '16 is completed, I think the bulk of '17 is completed, but I know for certain that all the '16 is completed and I think substantial portion of '17 has completed.

Brandon Oglenski

Well, because it is critical to the outlook here that that loan can be called back, otherwise we are coming up pretty short and we are not necessarily saying that there is a liquidity problem for Seaspan. But the context that we are approaching this is -- can you say definitively today that a dividend cut or some sort of equity raise or preferred equity raise is off the table as optionality for meeting commitments in the next few years at Seaspan?

Gerry Wang

I think you have a couple of questions embedded in there. But maybe I will first address it in the context to your first question regard to. I believe your concern is if GCI does not have committed new vessel financing, how would it finance those vessels, and how would you get repaid your loan, which is a fair question.

I think if you look at today the capital commitments to GCI from an equity standpoint and the inception of the entity is $900 million. I think today that there is roughly you can take our committed capital and extrapolate that through, I think roughly we have, there is probably another $500 million to $600 million maybe over $600 million of capital, which contractually can be called, but has not yet been called. So we feel very comfortable that even a full disaster scenario, when they get no financing for their ships, which is completely inconsistent with the track record today, that the contractual obligations as a partners, the Carlyle and Tiger, the Washington Family and including us, those obligations for those capital calls will be met and we'll be repaid.

Brandon Oglenski

But I guess to the second part of my question, even if that's fully repaid, is a cut to the dividend potentially or some other form of equity raise be it preferred or common, is that off the table at this point as you look into '17?

Mark Chu

So I think that I have to go back and say that all these issues, including the dividend, equity raises and all these issues is something that we as a management team will get consistently constant and we visit with the Board on a regular basis for the very least on a quarterly basis. And all this items, including our liquidity our treasury management are all examined and all these factors are taken into account.

Now, reflecting back on your first question regarding dividend cut, I think when we set our dividend policy and we announced it last quarter, the Board is very conscious that one of the basic parameters, which we followed since the inception of the organization is that we have a sustainable dividend and we took that concept of sustainability into account, when setting the policy for this year. So maybe that will answer your question.

In regard to capital raises and all those items, we have a history of going-to-market to raise capital. So I don't think keeps anything on the table, off the table, it's all opportunistic at the right point in time.

Operator

And our next question comes from the line of Chris Wetherbee with Citi.

Chris Wetherbee

Maybe just thinking continuing to think about sort of buybacks and other uses of cash. When you think about the buyback specifically, you did a little bit in the first quarter. You have some obvious uses of cash coming up over the course of the year. I mean how do you think about sort of buybacks relative to that? Should we expect this to basically go flat from here or you're still opportunistic in the market around these levels?

Mark Chu

I think, as a general statement, Chris, we are opportunistic. We have $0.5 billion, I'll call liquid assets on hand. And I just turn back to our comments is that we're fortunate to have many competing uses of capital, whether they're projects, whether they're some Series preferred C is an obvious need. And from time-to-time, where we feel it's in the best interest of the company and our shareholders, we will go back and repurchase our common stock. And part of our policy also in regard to our liquidity, the distribution of dividends, returning capital to our shareholders, so all these things are taken into account.

Chris Wetherbee

And then I apologize to come back to a topic that's been discussed repeatedly. But just on the GCI loan, you talked about advances for vessel deposits, and then in the context of having '16 roughly covered in terms of financing needs at GCI. When you think about those advances that you've made in the last two quarters to the company, are those for deliveries in '17 and '18? I mean, I'm trying to get a sense of sort of what that capital is being put to now. I understand sort of the payback parameters and where the calls for their returns to you would come from. But I'm just trying to understand sort of just technically where the money is going right now?

Mark Chu

As that will start to deliver over the course of '16, there were some cash needs in GCI, and we had excess liquidity. So that saying on a technical basis, you have to look for all the ins and outs. But if you look at all the ships that are delivering '16 and the installment payments that are coming to you an accelerating, as the ship starts to deliver, that is the reason why the balance went up and you'd have to look at the '17 deliveries.

So there is a chart, which -- really, it's a mechanical thing to the extent and installment payments are due under the respective shipbuilding contracts. We have excess liquidity, GCI will come to us and make a request, we'll examine our liquidity and we'll make those advances at the point in time some ships delivered, we get repaid our funds.

On a mechanical nature, the installment payments have exceeded the repayments just over this quarter. But as you look at the order book and as it declines, you will see that balance start declining due in ordinary course. If we have a need for capital, we will submit our call and we will get paid in 45 days.

Chris Wetherbee

So in the current quarter, there was both inflow and outflow within this account, right?

Gerry Wang

Right.

Chris Wetherbee

And one last question for me. Just in terms of there's roughly $400 million of CapEx for 2017, should we assume the majority of that is op lease? And then just generally speaking, should we assume op lease sort of rates roughly in line with what you've just done?

Mark Chu

I think this is a combination of traditional financing, operating -- traditional financing and a sale-leaseback on a capital lease basis, you're speaking of the $250 million sort of aggregate financing we have in place, Chris. So I think that that meets all the CapEx obligations in the bulk of our unfunded CapEx. So call it unfunded related to the vessels, which we have flexibility on which to defer the delivery date and deferred CapEx.

Gerry Wang

Chris, one thing I want to add is, in those operating leases, they are not available for all vessels. They are more specific to certain charters we have in certain jurisdiction, which I do not want to name for commercial reasons. But what we do is if we can put them to operating lease, we do, if not then we will have the traditional bank financing.

As Mark has pointed out, we have a very robust demand for those type of vessels. To be honest, our financing boys even today are having a pretty good time in terms of working with our banks for putting financings together for those vessels.

Chris Wetherbee

So it's a mix. It's not operating leases.

Gerry Wang

I wish I could follow them, but unfortunately the world is not structured that way.

Mark Chu

And we'll continue to be a mix, as we manage the capital structure, expect to see a mix of traditional bank financing, some capital leases, some operating leases. So there will be a mix.

Operator

And we do have a follow-up from the line of Donald McLee with Wells Fargo.

Donald McLee

I know the call has gone over a bunch, but I had a quick question on the balance sheet. So it looks like current debt increase during the quarter, after you guys repaid $90 million of debt during Q1, was there is like refied revolver there or what explains that those two movements?

Mark Chu

So I can walk you through. So that's a comparison to December 31, Don. So what we did was, we have one unencumbered, a 10,000 TEU vessel, we repay that loan I think in September 2016. We had excess liquidity, but we had a refi facility in place. So we decided we might bother drawing on the refi facility, until its availability periods starts to end. As availability period ended in Q1 2016, so we driven our refi facility, so that generated about $74 million, $75 million for us.

In addition, we drew on our revolver and that's going to be repaid in another couple of days. That's just a temporary use of capital to bridge a delivery installment payment, but there are some limitations and time periods on which we can repay that has remained outstanding for a period of time into our revolver that will be discharged in a matter of days. And that's offset by the natural principal amortization over the period.

Operator

And I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Wang, for any closing comments.

End of Q&A

Gerry Wang

Well, I just want to say, thank you for taking your time to listen to this earnings call. And it is spring time and we're looking forward to a great summer ahead of us. As I reiterated, the industry is going through reforms and the shape is still being developed. Once the alliance has been established towards later this year, we will anticipate a very solid demand for bigger vessels and new vessels for the operators, for the industry, for their pursuit of cost reduction for the operations. So we're looking forward to exciting times ahead of us. In the meantime, we'll continue to work as smarter as hard as you all and we appreciated your support, and have a great summer and have a good time. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

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