Seaspan's (SSW) CEO Gerry Wang on Q2 2016 Results - Earnings Call Transcript

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Seaspan Corporation. (NYSE:SSW) Q2 2016 Results Earnings Conference Call July 26, 2016 9:30 AM ET

Executives

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

David Spivak - Chief Financial Officer

Analysts

Ben Nolan - Stifel

Brandon Oglenski - Barclays

Ken Hoexter - Merrill Lynch

Chris Wetherbee - Citi

Noah Parquette - JPMorgan

Amit Mehrotra - Deutsche Bank

Kevin Sterling - BB&T Capital Markets

Gregory Lewis - Credit Suisse

Operator

Welcome to the Seaspan Corporation conference call to discuss the financial results for the three and six months ended June 30, 2016. Hosting the call today is Gerry Wang, Chief Executive Officer, Co-Chairman and Co-Founder of Seaspan Corporation; and David Spivak, Chief Financial Officer of Seaspan Corporation. Mr. Wang and Mr. Spivak will be making some introductory comments, and then we will open the call for questions.

I will now turn the call over to David Spivak.

David Spivak

Good morning, everyone, and thank you for joining us today. Before we begin, I would 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 second quarter 2016 earnings release and in earnings webcast presentation slides available on our website at www.seaspancorp.com as well as in our Annual Report filed on Form 20-F for the year ended December 31, 2015 and a report filed on Form 6-K for the three months ended March 31, 2016.

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 diluted. 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 or the appendices at the back of the earnings slide.

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

Gerry Wang

Thank you David. Good morning to everybody from beautiful Vancouver BC Canada. Please turn to Slide three of the webcast presentation. This was a very active quarter for Seaspan both in terms of our performance and the ongoing execution of our strategic plans. There are several topics I would like to discuss.

First, continued access to capital on a global basis. In Q2, we strengthened our balance sheet while expanding our sources of capital. We secured over $1 billion in capitals through multiple financial transactions. We raised over $350 million of equity in three financings. We sourced over $700 million of capital from Asia demonstrating our strong global access.

Second, strong control of operating cost. During Q2, we saw the benefits of the implementation of our cost controls. We were able to hold our operating cost constant while our vessel ownership days increased over 10% with [ph] a view of this the remarkable achievement and demonstration of the strength of our operational capabilities.

Third, delivered on growth strategy. During Q2, we continue to grow our fleets. We added three vessels the 10,000 TEU MOL Beyond, the 14,000 TEU YM Window and the 14,000 TEU YM Width all SAVER design vessels. We also acquired two 11,000 TEU new build vessels from GCI which will begin 17 year bareboat charters with MSC when they deliver in 2017. This vessels will be sister vessels to three vessels we have already owned.

As a result in Q2 all of our key financial metrics increased compared to the same quarter of the prior year. We achieved double digit growth in revenue. We increased our adjusted EBITDA and cash available for distribution to common shareholders by approximately 5% and we increased our normalized EPS diluted by 36.4%.

We also paid a dividend of $0.375 per share common dividend during Q2 and expect to pay an annual dividend of $1.50 for the 2016 fiscal year. While this was a busy quarter for us in many ways, it was business as usual.

Even though Seaspan has grown at a compounded annual rate of over 20% since our IPO our business model and the cost strategies have remained consistent overtime. I will now turn the call over to David to discuss our quarterly financial results. David, please.

David Spivak

Thanks, Gerry. Please turn to Slide four where I will discuss the results for the quarter ended June 30, 2016, compared to the second quarter of 2015.

Revenue increased in Q2 by $25.2 million or approximately 12.6%, the increase was primarily due to 2015 deliveries of eight vessels, full quarter impact of the MOL Benefactor, partial quarter impact of the YM Width, the MOL Beyond and the YM Window these increases were partially offset by lower average charter rates for vessels which were on short term charters.

We achieved vessel utilization of 98.1% compared to 98% in the same quarter of the prior year. During Q2, 2016 we completed three schedule dry dockings resulting in 90-days of off-hire, a decrease of 47 days from the same quarter of the prior year. We had 125 days of unscheduled off-hire in Q2, an increase of 52 days from the same quarter of the prior year.

As Gerry mentioned, ship operating expenses were kept at $49.2 million, a decrease of $0.1 million from the same quarter of the prior year despite the fact that our operating fleet ownership days increased by over 10% from the same quarter of the prior year.

To put this in perspective, Q2, 2016 ship OpEx for ownership day was $6468 compared to $7142 in the same quarter of the prior year. We were able to achieve this through disciplined cost management.

General administrative expenses were $9.1 million, a $2.7 million increase from Q2, 2015. The increase was primarily due to professional fees and other corporate expenses incurred. As part of G&A, we incurred approximately $1.5 million in non-cash stock compensation expense.

Operating lease expense was $20.7 million in Q2 2016, a $12.1 million increase from the same quarter of the prior year. We ended the quarter with 12 vessels under operating leases versus six vessels at the end of Q2, 2015.

Normalized EPS diluted was $0.30 compared to $0.22 per share in Q2, 2015 a 36.4% increase. The increase was due to strong earnings contributions from eight new built vessels delivered in 2015 and from the 2016 deliveries, the effectiveness of our cost control measures and a lower all in cost of financings.

Adjusted EBITDA for the second quarter of 2016 was approximately $177.2 million, representing a 4.9% increase from the same quarter of the prior year. Cash available for distribution for the second quarter of 2016 was approximately $111.2 million, representing a 5.2% increase from the same quarter of the prior year. These increases in both metrics were primarily attributable to the contribution of vessel additions since the same period last year, partially offset by higher G&A.

Cash available for distribution to common shareholders benefit from lower interest at the hedge rate offset by increases in cash dividends paid on preferred shares associated with the early redemption of the Series C Preferred shares.

Our cash balance at the end of the quarter including short term investments was $349 million and benefit from a partial repayment of the demand loan to GCI. Our available liquidity is bolstered by a currently undrawn $150 million 364 day revolving credit facility and the remaining $74 million demand loan to GCI. Total borrowings remained flat since the beginning of the year.

On Slide five, we show the growth in our revenue and cash flow over the past few years.

Please turn to slide six, where I will briefly summarize our equity initiatives in Q2. In Q2, we redeemed all of the 9.5% Series C Preferred Shares and replaced them with higher quality equity capital. We had previously indicated that we would redeem these high cost securities and we achieved that goal fully in Q2.

The equity that we raised in the second quarter was comprised with common shares including the $50 million investment from the Seaspans founders, a new series of perpetual preferred shares and convertible preferred shares sold to a third party investor base in Asia. These recent raises highlight our ability to access various pockets of equity capital.

Please turn to slide seven. During the quarter, the company raised over $700 million in Asia. We raised several different types of capital including $420 million in 17-year capital lease financings, $144 million sale-leaseback transaction for the YM Width, where we have a deferred gain of $32 million and a $140 million of convertible preferred equity. These financings demonstrate the company’s extensive relationships with the broad range of financial institutions and investors throughout Asia.

Building on these relationships is the strategic priority for Seaspan and we believe a source of competitive advantage. We see huge demand in Asia for U.S. dollar denominated yield assets backed by quality issuers such as Seaspan.

Please turn to slide eight for our forward guidance for the current quarter. We do not intend to update our quarterly guidance in the ordinary course of communications. Looking forward to Q3, we anticipate that revenue will be between $226 million to $231 million. The increase is due to the full quarter impact of the MOL Beyond, YM Window, and YM Width as well as the partial quarter impact of the Maersk Genoa vessel delivery expected to deliver in September. This is partially offset by vessels rechartering during the quarter at current market rates.

In providing a range of revenue, we have assumed that we continued to recognize full revenue under all our charters including those with Hanjin. We currently have three 10,000 TEU vessels chartered to Hanjin under long term charters at $43,000 per day. So Q3 revenue expected from Hanjin is approximately at $11.9 million.

As we have previously disclosed Hanjin announced in May that it is pursuing a voluntary restructuring agreement with its creditors. We have been approached by Hanjin for a reduction in time charter rates for 3.5 years in exchange for securities in Hanjin, we have declined this offer. As of June 30, 2016 we had accounts receivable outstanding from Hanjin of approximately $11.6 million. We have not taken an allowance against this receivable.

It is highly uncertain how the situation with Hanjin will evolve and this may impact whether the guidance we have provided is realized. We expect to ship OpEx to increase slightly to a range of $50 million to $52 million due to the full quarter impact of the three vessels from Q2 throughout the partial quarter impact of the Maersk Genoa vessel delivery expected to deliver in September.

We expect our operating lease to range, operating lease expense to range between $24 million to $26 million next quarter, due to the full quarter expense from the three vessels that were financed with operating leases in Q2. We anticipate that G&A expense will range between $7 million to $9 million in Q3 due to the lower anticipated professional fees in Q3 versus Q2 offset by an increase in share based compensation primarily associated with the full quarters expense related to CO [ph] compensation entered into during Q2.

We expect Q3 G&A to include approximately $1.8 million to $2.2 million in non-cash share based compensation expense. Note that these amounts are based on current information and estimates and are subject to change. One of the areas that I will be reviewing in my new role of CFO is the guidance the company provides to the market including whether to provide guidance on a cash flow measure.

The heart of Seaspan’s DNA is to generate predictable cash flow and pay a meaningful dividend to shareholders and we plan to take the next couple of quarters to evaluate the guidance practises of other hard asset dividend paying entities like Reach [ph] and MLPs which often provide guidance on a cash flow metric. We also plan to seek feedback from analysts and investors over the coming months on this topic.

I would now like to pass the call over to Gerry.

Gerry Wang

Thank you, David. Please turn to Slide nine where our company Seaspan lead to the global containership fleet. On a fully delivered basis, Seaspan owned managed fleet consists of 118 vessels including 14 new buildings representing a total capacity of close to 1 million TEU. As illustrated, Seaspan is the world’s largest independent containership lessor with a fleet including new builds and managed vessels that is more than twice the size of our nearest competitor.

The long term charter contract on our vessels with an average remaining term of 5.4 years have total constructive future revenue of over $6 billion. In addition, the average age of our fleet is approximately 60 years younger than the global containership fleet average with an average size of approximately 8.2 TEU [ph] twice the size of the average industry size.

Please turn to Slide 10, where I will briefly discuss the industry. Year-to-date 87 containerships representing approximately 290,000 TEUs have been sold for scrap. This surpasses the total of approximately 200,000 TEUs scrapped during all of the 2015 and we expect scrapping levels to remain elevated throughout the year. In addition, a total order book continues to gradually decline and vessels delivered and new vessel order remains very limited. The order book currently spends at approximately 17.5% of effective loading capacity or about 6% per annum on average.

Overtime, we believe the combination of elevated scrapping and a limited new building ordering should help improve the industries supply and demand factors. The industry idle capacity has dropped to approximately 4.6% driven lower as we head into the typically busier summer period. In terms of overall demand, we expect container trade volume measured in TEUs to grow modestly for the year 2016 and 2017.

Overall, we expect market conditions to gradually return to more balanced levels overtime. However, we expect the industry to remain challenging during 2016 and do not expect the material change in time charter rates in the near term, which will remain at historical low levels.

The challenging market conditions have lead to significantly industry consolidation which we feel is a positive development for the industry's long-term prospect. Within the merger announcement from UASC and HL, CMA, CGM and NOL Cosco, MCS, CL and the recent positive Hanjin of HMM to the 2M Alliance all point to a more coordinated industry environment.

Please turn to slide 11 where I will reiterate our vision for future. We believe Seaspan is well-positioned to continue to capitalize on its leadership position to benefit from opportunities in the market. We'll focus on being the partner of choice to the leading liner company.

As a ship leasing franchise we consider it to be critical to consistent and maintain a strong balance sheet, diversifying our capital structure and to enhance our financial strength including maintaining appropriate leverage will remain our top priorities.

We will continue to pursue fleet growth with our control and balance approach being patience and discipline 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, which will closely monitoring – while closely monitoring our costs. We will remain committed to a sustainable retaining capital to our shareholders.

Overall, we believe we are well-positioned to manage through current market conditions and that our strong base of cash flows from existing charters as well as future growth will enable our franchise to remain strong over the long-term.

Please take a look at the picture on slide 12, which shows our 10,000 TEU vessel, the MOL Benefactor making history as the first Neo Panamax vessel to perform our commercial transit through the newly expanded Panama Canal. Also MOL Benefactor was the largest container shipment that ever caught at the East Coast port of the United States.

Thank you. Now it’s a Q&A time.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is going to come from Ben Nolan of Stifel. Your line is open.

Ben Nolan

Great, thanks. I had a couple of questions for you guys. Number one, could you maybe walk me through how things are developing with GCI. I know that you guys have acquired several vessels and I believe the Series F is somewhat contingent upon or the step-up in dividend is somewhat contingent upon whether or not you execute on the rolling of GCI. Is it the current thinking maybe do that a piece of the time or maybe could you just talk me through exactly what's happening there?

David Spivak

Sure. Hey, Ben, it's David. I guess a couple of parts to your question. I guess just first on the Series F, which is a convertible Preferred C, where the conversion price is at 18. The initial yield is 6.95%. And there is a feature that if all of substantially, all of GCI's assets were not acquired by December 31, 2017, at that point the coupon would step-up to 10.5%. And at that point we'd also have the right to call the security and the holder would have obviously has to right to convert this security.

And so it’s a bit of a complicated security. But there is that sort of step-up as you highlighted. Although it's not sort of the punitive type step-up like you saw in the Preferred C. Its punitive but not orneriest like the other was. I think on GCI, look, there were couple of transactions during Q2, they're sort of directly or indirectly involved GCI. I think there was the acquisition to MSC vessels with long-term charters.

We did lease in a couple of vessels. The GCI previously owned and sold to a third-party leasing entity. I think its sort of wait and see. You know, we've evaluated them fair bit in our joint venture partner and always have ongoing dialogue, but it's hard to sort of extrapolate from two transactions. So it's something that we monitor. We always have dialogues, but I guess we're going to see just how it sort of plays out through time. But I don't think we have sort preordained views how that will evolve.

Ben Nolan

Okay. Well, and you mentioned something there, the MOL Beyond and MOL Window, the two that you leased and that were I guess sold by GCI to a third-party and then you lease back. Is there any economic benefit to that, I mean, obviously I appreciate that your expenses go up as your revenues go up, but is that sort of net neutral transaction or how should I think about that and maybe the potential for other similar transaction?

David Spivak

Well, I think look, I wouldn't say it was a net neutral. It’s a net positive. I mean, we're only going to do transactions that we expect to be accretive independently and we expect both those transactions to be accretive. And they were accretive actually to our results in Q2. So, I mean, there's no sort of one size sort of fits all. I think from our perspective we evaluate things and if there is something to ever sort of disclose if and when that ever happens we will obviously do that.

Ben Nolan

Okay. You didn't pay anything for those so to speak, right. There is no compensation.

David Spivak

No. We assume the charters to MOL and Yang Ming and we obviously have leased in those vessels, but they are both like accretive transactions to us.

Ben Nolan

Okay. That's helpful. And then just two more quick ones. Number one, I know in the past you -- Gerry mentioned that for those two on contracted vessels that are 2017 delivers that you might push back the delivery dates of those in event that you don't have contracts. Does there any movement in that regard?

Gerry Wang

Hi, Ben. Gerry here. Yes, we have had discussions with two, three potential charters, but we have not agreed on anything yet in terms of the duration of the charter and charter rates. So we still sort of looking and evaluating the opinions in our hands. In terms of delivery time, we have tremendous flexibility. We can push vessels to 2018 if need to be. Again the flexibility is in our hands to be at and we'll see how things go. And we'll remain optimistic about the employment prospect for these two vessels.

Ben Nolan

Okay. And then the last one from relates to some of your Panamax, obviously quite a few of those have come off of their previous charters and recently looks like you have full employment on them, which is good, but at pretty low levels. I know in the past year you've said that you didn't think that was sort of an impaired asset class, just sort of a function of weak market in terms of the rate. Is that still your current thinking? And we have seen some other owners scrapping 15, 16-year old Panamax. Is that completely off the table you just going to continue to operate or maybe just walk me through what you're thinking on the Panamax side of your business?

Gerry Wang

Okay. Good. You know, as far as our Panamax vessels are concern, the good news is that they're fully deployed. They're fully working. The bad news is the rates are very depressing, historical lows. The reason for the full employment is really vessels panning out, because they will carry out a number of upgrades for vessels and also our performance of the vessels is also very good compared with others who are suffering financially. They don't have the financial strength to carry out the upgrades as we have done and also the maintenance in other work that we do for our vessels to make sure the vessels are performing in the best conditions possible.

With regards to the future potential arrangements for those vessels, we're currently evaluating couple of opinions which may include scrapping couple of vessels, and the older ones you know especially few 4600 TEUs we took from MOL. Our board has supported our decision to look at that, the potential demolition for those vessels. The reason for that, with the new Panama Canal we believe the 290 meter 4600 TEUs would become permanently obsolete, so we are looking at ways to sending them to most likely for demolition or in the second hand market for sell transaction. So, we hope others would follow suit and hopefully demand/supply situation for the Panamax vessel would improve over time.

Ben Nolan

That's very helpful. Thanks a lot Gerry and nice quarter. That's it from me. Thanks.

Gerry Wang

Thank you.

Operator

Thank you. Our next question comes from Brandon Oglenski of Barclays. Your line is open.

Brandon Oglenski

Hey, good morning guys. And thanks for taking my question here. So, you guys highlighted that you have some receivables building with Hanjin. Can you speak to your other customers is there anyone else out there in a similar situation? And then more specific to Hanjin, I mean, I know you said you don't know the likely outcome at this point, but is there going to be a process through which this could become non-voluntary?

David Spivak

Yes. So, it's David. The all other customers our current, so as far as a charter receivable, I think their receivable with Hanjin is really it. I mean, there are some miscellaneous things, but they are de minimis. I think most of our other receivables are amounts owed to us by shipbuilders or insurance claims or warranty claims and things like that.

You know, Gerry I don't know on Hanjin. If you want to sort of comment. I think generally what we'd say is it sort of fluid. I don't think we have perfect insight into how that process will play out. There's a lot of different stakeholders. Inevitably these things can do sort of drag on. And so, I don't think we'd – we'd want to speculate. I don't know Gerry if you have some comments.

Gerry Wang

Yes. I think we have made couple of public statement about our position vis-à-vis Hanjin shipping. We've made it very clear. We'll not entertain the rate reduction. We believe that is the violation of contract in the spirit of a major OECD country having $1.5 trillion of GDP with almost 50% derived from exports. That is not a good action. We do not support that. We have never had such situation before with any of our other customers and Hanjin shipping has been the only one. But on the positive side we only have three vessels on charter of the Hanjin Shipping. So the exposure to Hanjin shipping is limited. That's a second point.

The third point is that the discussions with Hanjin Shipping between the owners and Hanjin Shipping have been very fluid as pointed out by David, changes from day-to-day and like Vancouver weather in the winter its highly unpredictable. We'll see how things go. But we believe our Korean friends, the Korean government and the shareholders there and Hanjin Shipping will become more rational. They will soon realize honouring contractual obligations at the international stage is very important practice. They need to follow in order to be internationally reputable. I believe South Korea has become a powerhouse in the world. And I believe and I hope the Hanjin Shipping handling will be conducted accordingly.

Brandon Oglenski

Okay. I appreciate that David and Gerry. Can you also disclose to us the exposure at GCI as well to Hanjin, because my understanding is that you do have a couple of vessels on lease in GCI as well?

Gerry Wang

GCI currently have four vessels versus three vessels from Seaspan, so they have slightly larger exposure to that. The position taken from GCI Carlyle is that same as Seaspan. We'll figure there, Seaspan would lead the whole the discussions with the Hanjin Shipping.

Brandon Oglenski

Okay. Then on subject of GCI, can you guys just help us here. So there were four vessel transactions I think in Seaspan and GCI this quarter a very recently. And my understanding here is that on the sale leased back transactions for the two vessels on contract to-date plus the two newbuildings. On a couple of those transactions there was no consideration paid to GCI. And yes, David, you did highlight that's going to be accretive to earnings. So I'm wondering what's the incentive for GCI to handover an asset that arguably would have been generating results for [Indiscernible] nothing?

David Spivak

So, maybe just little bit of clarification, we did this lease from a third-party leasing entity. The MOL Beyond and the YM Window, okay. GCI sort of sold those vessels to that sort of third-party. So it was a – we're all involved but we're involved in kind of different stages there. I think from our perspective we're leasing under an operating leases, those operating leases are 11 to 12 years and we do have purchase options. And we obviously have charters that were sort of contributed to us.

That type of transaction would only make sense to us if it was sort of economically accretive which they were. From GCI's perspective obviously they exited those vessels by selling to a third-party. And so we were kind of all of party to the transaction kind of different size of it. But we didn't you know – we don't own the vessel. We just have control of the vessel under the lease and have the ability down the road in sort of 9 and 9.5 years if we chose to exercise we have buy the option otherwise those leases will run off.

Brandon Oglenski

Okay. I guess just from a higher level than you guys entered into the financing here that obviously has a potential to expedite a GCI acquisition by Seaspan. What is the incentive for Seaspan to own the remaining assets in the joint venture? Would that be an accretive transaction where you guys are looking at it?

David Spivak

I guess, Brandon, I sort of step back any transaction that we look at has to make economic sense. And we look at lot of transactions. So, there is sort of obviously we acquired two MSC vessels from GCI and there were couple of transactions involving leases. Each of those independently after sort of makes sense. And frankly whenever there's a related party elements there's a heighten sense of scrutiny within Independent Conflicts Committee and their own Advisors.

But frankly whether it's looking at GCI or looking at anything else. So I think for us to act just has to make sort of economic sense. We have to sort of view attractive. It kind of has to consistent with the longer term philosophy of the company and the focus on cash flow. So, I think that's probably how the best answer we can give you.

Brandon Oglenski

Okay. Thank you.

David Spivak

Thank you.

Operator

Thank you. Our next question comes from Ken Hoexter of Merrill Lynch. Your line is open.

Ken Hoexter

Great, Gerry and David. Congrats on a busy quarter.

Gerry Wang

Hi, Ken.

Ken Hoexter

Hey, Gerry. Just on the merger Alliances, obviously a lot of moving parts and that's going to develop as we enter into next years. Just want to get your thoughts Gerry, since we've been through this maybe a couple of times. Does that reduce demand for vessels as the Alliances work to refine their sellings? Or does it actually end up expanding it. Just want to get your thoughts on the past impacts and what we should think about as that moves forward?

Gerry Wang

Frankly, Ken, I've been evolved with those transactions. They're been giving advices to see liner operators involve in those transactions. One of things we're looking at it is the market – the number of market participants in terms of freight rates, in terms of internal competition trying to driving down the – again competing for cargo, driving down the deferred rates. They think with four lines is coming down to three that would help the situation.

Fundamentally we believe, with 75% of the load factor, the industry should be breakeven, anything more then 75% of the load factor like airline business, you should be profitable. I think that's the belief and that's the target they have to be shared by these three Alliances right now going from four to three. From that perspective I think it’s a very positive development.

When it comes to ship demand generally speaking the situation can be very interesting for certain vessels, larger vessels, fuel-efficient vessels like our 10,000 TEU, 14,000 TEUs, yes, there would be more demand, because they can pull the cargo shipments all together. But for certain sizes that we call them the too big or too small sizes like 6000 TEU, 7000 TEUs, they will be struggling because they are too small for the main trades and too big for the intra-Asia for the small trades.

So, the demand for the feeder vessels, we believe the Panamax vessels will be active in the future after the restructuring because they are suitable size for intra-Asia, Asia to Africa, Asia to South America, so we remain very optimistic about the future prospects of those vessels. So is the case by case situation depending on the size of the vessels, but generally speaking the tone is for larger vessels, the utilization would be better, therefore the demand will be also better. So they're able to pull all the vessels together to achieve the maximum efficiency to repeat again on the load factor and the profitability for the industry, the Alliances is determining to bring profitability into the industry. And hopefully when the ships are loading at 80% or above there would be profits to be high.

Ken Hoexter

Great. Thanks for that, Gerry. David, maybe just a little bit your thoughts on the cash flow available given your pending $100 million CapEx I think for the rest of this year $470 million of CapEx next year? Your thoughts on how you get there? And then I just want to understand when you're going through your outlook quarter-by-quarter you mention what you may or may not provide thoughts on cash flow going forward. Maybe can you just clarify that? I don't think I quite grasp, but what you were saying, you're going to stop providing that or you're going to look to give it in different ways?

David Spivak

Yes. So, two questions. Let me just go through each of them and if I forget the second one, remind me please.

Ken Hoexter

We will.

David Spivak

Okay. So, on the CapEx, there's about a $100 million of CapEx for this year. That is sort of fully financed. Basically what we have is the Maersk vessel being delivered in September. We have full financing against that and in fact we're evaluating a couple of things to even sort of do better than what we have in place.

In addition, we have that sort of $420 million capital lease facility to finance those five newbuilds. It was kind of in sort of two tranches, two of those newbuilds we acquired from GCI. The other three we have and those are all under 17-year bareboat charters with MSC. We've only drawn about 80. So there's another sort of 340 million. And so, the gap really relates to three vessels to the unchartered 10,000 TEUs and we have sort one vessel to Yang Ming next year.

Getting financing to get to the full 570 [ph] is going to be very easy. Obviously, we're sitting with a lot of cash on our books. So, from our perspective it's sort of fully financed. It's kind of just more a function of what tools we want to use for any incremental financing. So, for us that's pretty straightforward. I think the comment on sort of guidance was more – my background obviously was in equity capital markets and one thing that's sort of struck me is that the heart of Seaspan really is cash flow, paying the dividend is very important to us and to our investors.

And when I sort of look at -- we've provided sort of line item guidance, but when I think about kind of a major, if we were just slows beyond that to provide investors it would probably be a cash flow or to measure whether adjusted EBITDA, distributable cash flow available to common shareholders, REIT use AFFO. And so something like sort of guidance we want to be very thoughtful about it.

And the thinking is before we sort of go and jump in and put something now, we should be very fully informed about the various sort of practices and what others are doing and sort of learned from them. And so, that is kind of what I was trying to sort put out there. We're just signalling. It's something that we are going to look at. I would say more generally one of the things that I have done as well as the finance team over the last couple of months is we do spend a fair bit of time talking to groups and other industries that have similar business models about sort of some of the financing tools that they use trying to kind of go well beyond through the maritime industry and sort of learn from other.

And whether its guidance or different financial tools or other things we found that to be actually a very productive practice. And so it's something on it to do list. It's something that obviously we will take to our board at the appropriate time. But it was more just of like that.

Ken Hoexter

David, Gerry, appreciate the time and thoughts. Thanks again.

Gerry Wang

Thank you.

Operator

Thank you. Our next question comes from Chris Wetherbee of Citi. Your line is open.

Chris Wetherbee

Hi, great. Thanks. Good morning, guys. I wanted to ask about just following up on the Hanjin comment about receivables. Are they behind in their payments, I just want to get a sense or is that just sort of a normal core as receivables?

David Spivak

Yes. No. I think every sort of charter contract is different, but generally the way they structured as you pay in advanced at the beginning of the period, so realistically, there shouldn't be any receivable. So, the matter of fact that there is receivables by their very nature is effectively past to. I mean there are miscellaneous receivables, but occur under charge where you build back certain things in the ordinary course. But in the case of Hanjin all of the receivable of 11.5 million is basically past through.

We've been carrying receivables from Hanjin for a while, if you go back sort of several quarters, particularly there's been a bit of a build up. I guess honestly the way we look at it is -- we have a $6 billion plus balance sheet. Its $11.6 million receivables in the whole scheme of things, its bit of a rounding here, but it is something that – it is receivable we have from a charter. They are going through voluntary restructuring. It is three out of 89 vessels, soon to be three out of 90 vessels.

So, it is something sort of we're mothering. If you look back to the common offering that we did in the quarter, I think we disclose the receivable then with $11.6 million as well. And so obviously during Q2 there were some payments that were paid, but they are in arrears.

Chris Wetherbee

Okay. That's helpful. I just want to make sure, I understood. In terms of the cash available for distribution, the underpayment that they're making is excluded from that number or included now $211 million in the second quarter?

David Spivak

Yes. Because we excluded receivables its effectively I would say, it sort of included. I mean if you actually go through the chart starts with net earnings, there was no sort of reserve taken in Q2. And then we have a bunch of adjustments, working capital changes we never part of cash flow available for distribution.

Chris Wetherbee

Okay. So its far to say that the actual cash is a little lower than the 111 that you guys have reported?

David Spivak

If you look at that way, but the flip side is that there are obviously inflows that aren't factoring into that calculation either. So, working capital changes for a variety of reasons. There's obviously a bunch of other cash flows, but on that narrow points that would be right.

Chris Wetherbee

That's fair. So, there's a lot of other puts and takes. I just want to make sure, I sort of understood. That's helpful. Thank you. Can you just detail point here – can you give us what the share count should be in the third quarter post here the full dilution of the offering?

David Spivak

Yes. I think there's about and we have it sort of details, if not, it's not in this 6K, its like about 105.7 million shares, approximately that's – you know that's the common shares outstanding. On the convertible, for this quarter it was anti-dilutive, so it didn't really impact anything. But obviously that's kind of a quarter-by-quarter thing. And that's a 140 million where the conversion price is 18, but for this quarter's we went through the financials that was anti-dilutive.

Chris Wetherbee

Okay. That's helpful. And then just wanted to get a sense, in terms of the off-hire, the unscheduled off-hire, I think it was 125 or so days during the quarter. Last couple of quarters, it's been in that range. Is that a good number we should be thinking about as we go forward, still only 1.5% or so of total ownership days? Want to get a rough sense, or do we expect to see some of those vessels picked up under charters as we go forward? Just trying to get a sense of how that might play out going forward.

David Spivak

I think part of it's actually, if you go back I'll give a little bit more granular detail. In Q1 we had -- I think 119 off-charter days. And then in Q2 we have 111 off-charter days. So most of it is off-charter, some of it is sort of unscheduled off-hire just because of minor breakdown stuff in vessels or equipment during the process, but most of it sort of off-charter. And so, we've been very effective at actually been able to re-charter our vessels.

We do have sort of more short-term charters and so, it's really just the effectiveness of that that's going to sort of drive that. So every quarter we go we'll go through this and what I can't say, because we've put upgrade on some of the vessels, because I think charters want to deal with solvent and financially help the counterparties. We've had lot of success. So, it's sort of non-reasonable but sort of projection, but I think its something that's gong to sort of play out as based on certain number of vessels we have in short-term charter.

Chris Wetherbee

Okay. Yes, so assuming as to the extent that the market can strengthen and then there is sort of better availability for longer term charter that's probably going to be one of the key levers in looking at that number?

David Spivak

Yes.

Chris Wetherbee

Okay. That's helpful. And then just one last quick question. I think in the past you've given some level of EPS guidance and I know you mentioned you were reviewing how to think about the forward outlook and maybe cash flow is the better numbers to look at going forward, but just want to get a sense is it not providing that this quarter, is that part of this process of review of what we are going to be seeing from you guys going forward?

David Spivak

That's right. I think, look, I think there's a few different metrics that people look at sort of you know, some people look at EPS, some people look at adjusted EBITDA, some cash flow available for distribution to the common. And when we kind of look at it and if we were to overweight a metric, because that's the metric that we focus on the most, it wouldn't be EPS. We obviously monitor EPS and look at it. Its one of the consideration, but we're more focused on cash flow. And so, I think we've provided line item guidance. And even with some supplemental disclosure just in the text about non-cash equity compensation. So, frankly based on that people should be able to kind of triangulate to any metric that they'd like, but if we provide additional guidance on one metric it would cash flow oriented.

Chris Wetherbee

Okay. That's helpful. Thanks very much for the time guys. I appreciate it.

Gerry Wang

Thank you.

Operator

Thank you. Our next question comes from Noah Parquette of JPMorgan. Your line is open.

Noah Parquette

Thanks. Good morning. I just had a question on the leases with GCI, or from the ships from GCI. How are you guys thinking about the rechartering risk there? It looks like there's a two or three-year gap between when the charter expires and when the lease expires. Can you talk a little bit about how you value that and think about that?

David Spivak

Look, I think one charter is eight years, one is ten years, so it's down the road. I think when we look at it, it just the – it’s the nature of negotiations for the lease with the third party, what we thought were the best terms. There is sort of a bit of a gap, but the flip side is we have a lot lead time to get those vessels chartered, and so its part of the analysis, but its something that we comfortable with and actually it could be an opportunity for us. So, the flip side is we also have an early exercise, we have an option to buy if we want or just sort of run it off and so, there is a lot of ways to think about the future road with those vessels.

Noah Parquette

Is that structure required for lease treatment or operating lease treatment? Is there anything like or is it just the economics?

David Spivak

It's just the economics. The economics, I mean, I think the option is obviously going to be benefit to us, because it's at our option.

Noah Parquette

And then for the loan to GCI, it looks like the balance sheet, there is a big repayment of that. Can you talk about what happen there with individual transaction [Indiscernible]?

David Spivak

I think there are two, one is there was a repayment of about $4 million [ph], so that was sort of cash received. I think the second was really as partial consideration for the two vessels that we acquired the two 11,000 newbuilds that have the 17-year charters with MSC. Part of the consideration we paid was about $107.5 million of the demand loan. So effectively that was the satisfy part of the purchase price.

The flip side is that we've ranged lease financing – 17-year lease financing to finance those vessels and so we can draw down on that to kind of replenish the cash that we would have got had those demand loans been repay. And so it just – it just a way to reduce the loan balance and we have finance for those vessels that we can draw on the kind of replenish most of that cash, the cash equivalent value of them.

Noah Parquette

So just to be clear, so the $196 million purchase price, that includes the $107 million?

David Spivak

Yes. It was $107 million around that, plus we assume kind of the remaining instalment vessel, instalment obligations under those two contracts.

Noah Parquette

So, all of the considerations together is…?

David Spivak

Yes. It's about 195.6 and then we arrange to $168 million sort of 17-year lease financing. That will be on balance sheet of the capital lease financing for those vessels. And we can sort of draw on that a portion of that now and a portion as the instalment are due.

Noah Parquette

Okay. That's helpful. And then just really quickly, just back to the Hanjin, so just to confirm its like a rolling three months, you're still getting the payments but it just kind of a rolling three-month backlog essentially?

David Spivak

Okay. I think as of the balance sheet data it was 11.6 [ph], which is roughly 90 days.

Noah Parquette

Okay. That's all I have. Thanks.

David Spivak

Thank you.

Operator

Thank you. Our next question comes from Amit Mehrotra of Deutsche Bank. Your line is open.

Amit Mehrotra

Yes. Thank you, operator. Good morning, Gerry, David. How are you?

Gerry Wang

Hi, Amit.

Amit Mehrotra

Good. I'll try to make this quick – my first question is on the dividend. Obviously, you guys have been busy and successful with the sort of the growth and the financing initiatives over the last three months. I'm just trying to understand, Gerry, in your mind how this translates or how this could translate into future dividends to the common shareholders?

I think on one side, you're growing the cash flows of the company, but sort of on other side the market backdrop is still quite weak. And so I'm just wondering in your mind how you balance these two factored vis-à-vis any recommendation you'll provide to the board in terms of dividend payouts?

Gerry Wang

Well, Seaspan has a dividend policy and that increase our dividend in a manner that would preserve our long-term financial churn and also our ability to acquire vessels to expand our fleet whenever there is always the banners. But the same time our business is highly capital intensive. We have two banners [ph] increases in our dividend payable to owners. And also try to preserve ability to grow as well. So as a fund balance, but as far as 2016 is concern, we've made it very clear it would be $1.50 dividends.

But one thing you should take a look at is since March 2010 we would have increased the dividends six times. And obviously we still want to increase our dividends overtime like invest on the business growth and also our financial strength over a point of time. So we remain optimistic for our future and as a year by year situation for our board to consider all those factors for determining the right dividend path.

Amit Mehrotra

So Gerry if I mentioned reading in between the lines a little bit, can we expect 2017 to be sort of the lucky number seven times you guys raised dividends, is it -- is that what we can imply from your comments?

Gerry Wang

Only if I can – steal the brain power of our board members. But again, the whole point is it’s a balance.

Amit Mehrotra

Okay, well I will try it anyway. Let me just ask a couple ones for David if I could. On the -- I guess the asset impairment was not brought up, just wanted to see if you can update us on I guess it’s still $250 million to $290 million that you expect to book in the third quarter, if you could just confirm that. And also, I don’t believe that there’s going to be any material impact to the global gearing covenant. I think it’s still going to be in the high 50s maybe low 60% relative to 65% level, if you could just sort of confirm those two items please?

David Spivak

Yes, there’s been no change in the guidance for the impairments, I think for the last few quarters, we have indicated between $250 million to $290 million commencing in Q3. And so, it may all be in Q3, it could be spread between Q3 and Q4, the aggregate is in that range of $250 to $290 and you know it’s probably in the upper half of that range but there is no change at all.

And your second question was on -- this won’t impact at all sort of covenant compliance, I think we are comfortably within covenants including the hearing covenants and so it won’t have an impact at all.

Amit Mehrotra

Okay. If I could just ask one more, it’s a little bit of an odd question but I just wanted to ask it anyway to see how you thought about it. But it’s related to you know the new FASB lease accounting rules that I know they don’t go into effect for a while, but I’m just trying to understand conceptually you know how should we think about this in terms of impacting the financial position or actually the book equity of the company.

And just its related to that, I think if you guys you know essentially have to add the liability of the balance sheet, there is obviously a corresponding asset and I think its related to the right to use the asset over the lease term which I think gets recorded as an intangible asset and so I’m just trying to understand are there any implications to covenants related to tangible equity or anything like that and just how should we think about that overall thing from the balance sheet standpoint?

David Spivak

Okay. Let me take a stab at it, obviously that standard comes into place for 2019. So its a couple 2.5 years away and frankly I think we are just starting to kind of look at the standard and make sure we understand it, so our knowledge is well it’s going to evolve through time.

I guess the first thing is that when you look at the covenants that we have in our agreements. They are based on gap at the time of the agreement which is sort of existing gap. So whether this existing gap may change down the road as it stands today it doesn’t really sort of pick up what the standard is because it’s not in effect. The second thing is I think the intent of the standard is for operating leases beyond one year to bring them on to your balance sheet and they will be offsetting the asset.

The other thing that’s sort of interesting about the standard leases we understand it today, we have deferred gains on our balance sheet of a couple of $100 million and this standard may actually accelerate that into equity. Right now we amortize it into equity. That’s just based on certain of our current understanding as it stands. And you know this standard, you know one thing that struck me is, or there is a lot of leasing in a lot of different businesses and you know the economics of our business aren’t changing but the accounting will change. And I think how that sort of dealt with I think will play out over 2 years, 2.5 years but I think we are quite comfortable that by the time that standard is put in place that we don’t think there is going to really be any sort of real issue. I think there are different practises that maybe adopted through time, but you know what I will say is it’s something that has impacted a lot of this.

Amit Mehrotra

Could there actually be David, could there actually be re-rating in terms of the operating cash flow of the company because I guess if you pro forma you know the P&L for the new rule, I guess the leases are now treated as dead and so the rental payments will essentially be a financing item, so would the EBITDA and the cash flow, operating cash flow essentially be re-rated higher?

David Spivak

Well this is the irony of the standards. The balance sheet will change, but the income statements even though it’s a liability our stand is it will still show up as operating lease expense. So it’s almost like a mixed model, the balance sheet changes but the income statement doesn’t. And it’s -- as a former CPA, I’m a CPA but I don’t have an active license today. I found it fascinating the way that the accountants took the saw off approach of liability treatment for the balance sheet but lease treatment for the income statement. But you know that’s for the current understanding. So even that when you think about it, I think people will have an interesting time trying to figure out how they would reconcile that as they go through financial ratios.

Amit Mehrotra

Yes, well have fun with that. Well thanks guys, I appreciate it.

Gerry Wang

Okay, thanks Amit. Well -- Amit let just me add one minor comment on that issue here, hopefully this new standard will positively impact our charter is a little bit more in terms of we are counting achievements versus people like Seaspan.

Amit Mehrotra

Okay, got it. Thanks guys. Appreciate it.

Gerry Wang

Thank you.

Operator

Thank you. Our next question comes from Kevin Sterling of BB&T Capital Markets. Your line is open.

Kevin Sterling

Thank you. Good morning, Gerry and David and congratulations on another solid quarter in a challenging environment.

Gerry Wang

Thank you.

Kevin Sterling

One thing, most of my questions have been answered, so I’ll be brief here. But one thing that jumped out of me was your ship operating expenses. They were down slightly year-on-year despite a 10% increase in your ownership days. What, can you give us a little bit more color on what levers you are pulling to keep these costs in check even as your fleet grows?

Gerry Wang

Well Kevin, as we grow our fleet then we are taking advantage of the economy of a scale. Then we get benefits as a result of that, and also you know we are also benefitting from the silver lining of the global economy which is deflation, the costs have come down. If you look at the operating cost primarily more than 50% of the operating cost comes from the accruing cost with U.S. dollar being so strong with the deflationary pressure, with the shipping industry generally being in such a depressing situation, so we take advantage of that and Seaspan is regarded as a leader in this space is financially very strong company to able to attract a lot of people to come to work for -- so accruing costs come down in a nutshell.

Secondly, our insurance costs come down as while, that’s directly related to our performance if you have much reduced claims and incidence and the -- insurance claims over the period so we are enjoying a reduction in our insurance premium at the same time. Then the lubricating oil cost which is also a big -- for us has also come down as a result of the global oil price drop.

Then as far as maintenance cost, dry-docking cost has also been pushed downwards through our scope [ph] of the ship fleet size, so we try to take advantage of whatever we have then we are able to achieve very meaningful savings through the actions of our cost to control and we expect the trend to continue for some time as well as the U.S. dollar remains strong as well as inflation rate to stay at a very low level and our vessels generally become very modern that is not a contributing factor.

So all in all we are very happy with the achievement we have made for our cost control. You know one of the things I say all the time the revenue is on a decline for the Panamax vessels but we have to figure out ways to offset that decline and we have done a very good job on the cost of control side and that we have achieved very aggressive selling’s across our fleet operating these vessels including scheduled dry docking and special service.

Kevin Sterling

Yes and that was great Gerry, thank you. I really appreciate that level of detail. One last house-keeping item. You guys didn’t provide specific guidance on this, but how should we think about the cost of services line item going forward as GCI delivery schedule accelerates this year into next?

David Spivak

You know look, the reality is the revenue and the expense offset. So the net realistically is recharging back almost on the cost basis. So there is no real net -- I don’t know that there’s really ever been an income statement impact from that. It’s really been sort of logistic growth of revenue and expense, and so you know ultimately as they delivered there will be some revenue and expense and once everything is delivered obviously that will go away.

Kevin Sterling

Got you. Okay, thanks David. That’s all I had. Congratulations on a solid quarter and enjoy the Vancouver weather, it’s excellent and rich [ph] from Virginia where the heat index is 110 degrees.

Gerry Wang

Well a good time with the heat.

Kevin Sterling

[Indiscernible] thank you.

Operator

Thank you. Our next question comes from Gregory Lewis of Credit Suisse. Your line is open.

Joe Nelson

Thanks and good morning. It’s Joe Nelson on for Greg today.

Gerry Wang

Hi.

Joe Nelson

Hi. Just really one quick one from me, kind of getting back to a potential of GCI transaction, is the situation with Hanjin creating an impediment to finalizing or to taking down both the whole fleet and then I guess kind of piggybacking on that question. Should we be thinking that assuming we get some sort of clarity or some sort of resolution to the issue with Hanjin that that would sort of maybe precipitate a transaction of the GCI fleet?

Gerry Wang

Look, we don’t want to sort of speculate or cause sort of anyone this kind of extrapolate to conclusions. I think, look, we have three vessels with Hanjin, we are happy we have three versus seven. You know three for us is not the most material I think seven would be more material, so we are happy where we stand today. But I think how things play out with GCI or any other sort of transaction its wait and see and if and when there is something to talk about we will definitely discuss it at that point. But at this stage I think we did acquire a couple of vessels from them in Q2 which we are happy with, it was a good transaction for us and I think we’ll just wait and see how things play out.

Joe Nelson

Great, sounds good. That’s it from me guys. Thank you very much.

Gerry Wang

Thank you.

Operator

Thank you. I’m not showing any further questions in queue at this time.

Gerry Wang

Good, good so can I just make a very quick remark to conclude this call. Yes, you know Vancouver is not as hot as 110 degrees in Richmond, Virginia, that is a nice place to be, and also nice place to do business from to be honest.

And yes, we had a busy quarter and a very decent quarter. We are looking forward to continuing to execute on our strategic plan which is cost control which is in capital of financing and also trying to make sure we still have growth always as our target and so were looking forward to the remaining two quarters of the year and you know as far as the market conditions are concerned there are challenges but like everything else, there’s a silver lining. As far as we concerned, we are financially quite strong and we have no problem with our accessibility to capital and as a leader in this space we are think, we get very fair share of the growth opportunities presented themselves going forward.

And I just want to remind the audience once again Seaspan was born and grown through a crisis, and we love crisis and we are there to take advantage of whatever opportunities available to us. And thank you very much for your interest in Seaspan. I am looking forward; David and I are looking forward to speaking to you again for the next quarter. Thank you and enjoy your remainder of the summer break. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a wonderful day.

David Spivak

Thank you.

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