Seaspan's (SSW) CEO Gerry Wang on Q4 2016 Results - Earnings Call Transcript

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Seaspan Corporation (NYSE:SSW)

Q4 2016 Earnings Conference Call

March 01, 2017 08:30 AM ET

Executives

Gerry Wang - CEO, Co-Chairman and Co-Founder

David Spivak - CFO

Analysts

Michael Webber - Wells Fargo Securities

John Humphries - Bank of America Merrill Lynch

Chris Wetherbee - Citi

Noah Parquette - JPMorgan

Kevin Sterling - Seaport Global Securities

Fotis Giannakoulis - Morgan Stanley

Joe Nelson - Credit Suisse

Operator

Welcome to the Seaspan Corporation conference call to discuss the financial results for the Quarter and Year Ended December 31, 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 remarks and 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 fourth quarter 2016 earnings release and the 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 our report filed on Form 6-K for the three months ended September 30, 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 fourth quarter highlights as well as some recent developments.

Gerry Wang

Thank you, David. Please turn to slide three of the webcast presentation, 2016 was a challenging year for the containership industry in general and for Seaspan as well. The steps that we took will continue to enhance our balance sheet and has turned them our industry leadership position for the long-term value of our shareholders. I would like to point out a couple of highlights from the year 2016.

Firstly, we continue to upgrade our fleet. During the year we added five vessels on long-term contracts. Two 14,000 TEU vessels on 10 year charters with Yang Ming. Two 10,000 TEU vessels on eight year charter with MOL and one 10,000 TEU vessel on a five year time charter with Maersk. We've also being opportunistically modernizing our Panamax fleet by calling four units of seven to eight year old Panamax vessels from bank at [indiscernible].

Secondly, we strengthened the balance sheet. We raised about $660 million of common and preferred equity. We completed two strategic financings out of Asia and we reduced debt and ended the year with a net debt to equity ratio of about 1.7 times.

Thirdly, we continue to reduce operating costs. Throughout the year, we benefited from our focus on cost controls we were able to reduce ship operating expense by 11.7% during Q4 and 8.8% year-over-year. We view this as very positive progress that demonstrates the strength of our operational capabilities.

2016 was a challenging year for Seaspan primarily for two reasons, firstly Hanjin declared bankruptcy, which result in the termination of three lucrative long-term charter contracts. Secondary the Panamax vessels have experienced record lower charter rates. However we continue to manage the business through challenge market conditions taking necessary steps to improve our operating cost and strengthen our balance sheet.

While we believe the market conditions will improved after capital consideration the Board of Directors has made the difficulty decision to reduce the quarterly common dividend to $0.125 per share.

We believe a reduction in the dividend is in the long-term interest of our shareholders and will allow us to be both defense and offensive play, while maintaining financial flexibility.

I would now turn the call over to David to discuss our quarterly financial results.

David Spivak

Please turn to slide four where I will discuss the results for the fourth quarter of 2016 compared to the fourth quarter of 2015.

Revenue decreased in Q4 2016 by $5.3 million from the same quarter to prior year. The decrease was primarily due to unscheduled off-hire related to the three 10,000 TEU vessels previously chartered to Hanjin and lower average charter rates for vessels on short-term charters. These decreases were partially offset by the delivery of new building vessels and the addition of two leased in vessels in 2016.

No drydockings were completed during the quarter, we have 519 days of unscheduled off-hire in Q4 including 220 off-charter days for three 10,000 TEU vessels. The remaining unscheduled off-hire days primarily relate to periods in between charters for vessels operating in the short-term market. The amount of these off-charter days is similar to what occurred in Q3, 2016.

Ship operating expenses were $46.9 million, a decrease of $3.6 million from the same quarter of the prior year, this is despite a 5% increase in ownership days. As a result Q4, 2016 ship operating expense per ownership day was approximately $6,000, a reduction of 11.7% compared to around $6,800 per day in the same quarter of the prior year. We were able to achieve this reduction through disciplined ship operating cost management.

General and administrative expenses were $7.2 million similar to Q4, 2015. The non-cash stock compensation component of G&A increased from approximately $1.6 million in Q4, 2015 to $2 million in the fourth quarter of 2016. Operating lease expense was $26.6 million in Q4, 2016, a $12.2 million increase from the same quarter of the prior year. We ended the quarter with 13 vessels under operating leases versus 8 vessels at the end of Q4, 2015.

Normalized EPS diluted was $0.21 per share compared to $0.35 per share in Q4, 2015. The decline in normalized EPS was largely driven by a lack of revenue from the 10,000 TEU vessels previously chartered to Hanjin and lower rechartering rates and an increase in off-charter days. This is more than offset the benefits of lower ship operating cost and hedge interest cost.

Adjusted EBITDA for the fourth quarter of 2016 was approximately $131.9 million, a $49.2 million decrease from the same quarter of the prior year. Cash available for distribution for the fourth quarter of 2016 was approximately $71 million, a $44.8 million decrease from the same quarter of the prior year. The decreases in both metrics were primarily attributable to lower gains on sales from sale leasebacks, as well as lower normalized earnings.

We previously announced that we expected to recognize a non-cash impairment charge in Q4 related to some of our smaller vessels. During Q4, 2016 we recognized a non-cash vessel impairment charge of approximately $82.4 million related to six vessels. The total impairment charges for fiscal 2016 were $285 million, which is consistent with previous guidance.

In December we sold a 4600 TEU vessels the Seaspan efficiency to a ship recycler for net sale proceeds of approximately $6.2 million, resulting in the loss on disposition of approximately $15.4 million. Our cash balance at the end of 2016 including short-term investments was $368.3 million total borrowings decreased by $328 million in 2016. As a result of our capital initiatives in 2016. Our net debt to equity ratio declined to 1.7 times compared to 2 times at the end of 2015.

I'll now turn it back over to Gerry.

Gerry Wang

Thank you, David. Please turn to slide five where I will discuss container shipping industry in general. In 2016, approximately 200 containerships representing 655,000 TEUs or just over 3% of the world containership capacity was scrapped. Scrap in 2017 was expected to increase further to 750,000 TEUs or more with already over 165,000 TEUs scarped in the first two month of 2017.

The current order book stands at around 15% of the global fleet and we expect significant deferrals as operators seek to manage capacity. New vessel order in 2016 was extremely low at less than 200,000 TEUs, with little of new ordering on the horizon for the year 2017 or '18.

On the demand side, we saw an 1.8% increase in volumes for the Far East to Europe purchase for the year 2016. The Far East U.S. trade volume continued to show strength with a 4.3% increase and reached an all-time high of 14.2 million TEUs for the year of 2016. Global container exports increased by 3.5% to a new high of 180 million TEUs in 2016 and is expected to grow by 2% to 4% in 2017.

We believe the container industry has turned its corner, we see strong signs of supply and demand balancing works. While the overall container shipping recovery remains fragile this does take off a lot of pressure of our customers. We hope this will also translate soon into the recovery of the charter markets.

Please turn to next slide, one of the core principles of Seaspan’s business model is the pursuit of long-term fixed rate time charters with the strong counterparties. This is the foundation of our business model. We currently have a contracted revenue backlog of about $5.2 billion. The average remaining charter term for long-term portfolio is approximately six years and the average the vessel age is approximately four years.

For 2017 we anticipate that the long-term portfolio will generate approximately 94% of our revenue. These young and large vessels provide a stable foundation from which we’re able to navigate through the volatility of the business cycle.

Our short-term fleet made up mostly our Panamax vessels account for about 6% of our expected revenue over the next 12 months. Even though overall container shipping rates have recovered substantially charter rates for the short-term portfolio are currently at historically lows and below breakeven, which is not sustainable situation.

Weak owners, oil ships not upgraded to the prevailing operating standards will unfortunately be the victims. As this continues we believe there is significant upside for this part of our portfolio as improving supply and demand dynamics will ultimately drive rates higher. For simple math an increased charter rate of $1,000 per day in spot rates equates to approximately $10 million increase in annual earnings or around $0.10 per share.

While we will continue to modernize our Panamax fleet we plan to scrap several of our older Panamax vessels during the year 2017. We have no intention to settle down for further trading for competitive reasons.

Turning to slide 7, I will discuss Panamax market conditions in more details. Over the past few years we have seen decline in Panamax rates as a result of the cascading impact and the opening of the new set of bocks in the Panama Canal. We believe our Panamax fleet of 4,250 TEU design pioneered by Seaspan will continue to be the root cause.

The problem here is too many of this design were ordered, spot rates reached all-time lows in 2016 from very decent 2016, which led to a significant increase in scrapping. What’s noting here the order book for new Panamaxes is virtually zero. We believe current conditions are unsustainable and low rates and asset values would result in continued high levels of scarping and ultimately lead you a more favorable rate environment.

I will now pass over to David to discuss our forward guidance. David please?

David Spivak

Please refer to slide eight for forward guidance for the current quarter. We do not intend to update our quarterly guidance in the ordinary course of communications. Looking forward to Q1, 2017 we anticipated that revenue will be between $200 million and $204 million. There are 90 revenue days in Q1, 2017 versus 92 days in Q4, 2016, which has a negative impact on the revenue line.

In providing the range of revenue we continue to assume no revenue from two of the three 10,000 TEU vessels previously chartered to Hanjin, while the third 10,000 TEU vessel is on short-term charter for a portion of Q1.

We recently signed short-term charters for all three of the 10,000 TEU vessels beginning in early Q2 or a period of up to 12 months excluding the extension options. Ship OpEx is expected to fall within a range of $48 million to $51 million, which includes the impact of recent vessel transactions. We expect our operating lease expense to range between $26 million to $28 million.

We anticipate that G&A expense will range between $6 million to $8 million in Q1. The non-cash stock compensation component of G&A will be approximately $1.8 million. Interest rate expense at the hedge rate is expected to range between $37 million and $39 million. Note that these amounts are based on current information and estimates and our subject to change.

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

Gerry Wang

Please turn to slide nine where I will make a few closing remarks. We remain committed to our core business model and strategy and will seek to grow and strengthen our leadership position during this period of volatility. While some in our industry will have great difficulties to survive we know that the best returns are occurred during the periods of weakness and down cycles as Seaspan was born during Asian financial crisis as part of our DNA.

We have taken necessary measures to maintain a strong balance sheet, which will support the business to take advantage of cycles. We'll be looking to modernize the fleet through selective disposals, acquisitions and upgrades and trade older assets for new assets at zero or minimum net cost.

We'll look to grow our long-term contract backlog primarily through distress opportunities including modern second hand transactions, sale and leaseback opportunities and other distress opportunities as they may arise. We'll be creative in pursuing potential partnering opportunities as well. Finally, we'll continue to position the company to benefit from the recovery in the industry.

Please open the call for questions, operator.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Our first question will come from the line of Mike Webber with Wells Fargo. Please proceed.

Michael Webber

Hey, good morning guys. How are you?

Gerry Wang

Hey Mike.

David Spivak

Good morning.

Michael Webber

Hey. So wanted to first just jump in at a very high level obviously preserving cash with the dividend cut. Dave can you talk to how that cash ends up being used maybe what may or may not change within your lending base and whether you'd be prepaying any debt maybe for the Hanjin vessels that were fell off charter that you referenced that Gerry referenced in your charter update. Just kind of give us an update in terms of how the capital stack and liquidity profile, how you'll actively manage that going forward with a bit more cash on hand.

David Spivak

Sure I guess first thing, I think as we mentioned on the Q3 earnings call, that we were in advanced discussions to amend the facilities that were against the Hanjin vessels. And we did do that, and as part of that in Q4 we paid down about $15 million on a couple, I guess a couple of vessels in another case we put a small sort of restricted deposit. But effectively what we did as we sort of push things out.

So in one case we have till really Q4 this year to sort of find a replacement charter that's acceptable and then in the other case it's to Q4, 2018.

So that kind of where that has sort of played out. And so there really wasn't much sort of cash there. I think on the dividend what we focused on the lot was just the given the weak environment just sort of the profitability and sort of right sizing the dividend for the environment that we're in. I think as far as use of sort of the retained cash flow.

I think if you look back to last year we did a fair bid deleveraging, we raised a lot of equity capital and we sort of paid down debt at and particularly focused on maturities between 2018, and 2020, 2019 and just to kind of lower that and I think in our 20-F when it comes out you'll see how that's changed.

I think in the same way we are focused on certain capital structure metrics. Part of that retained cash clearly is going to be used for deleveraging. But we want to also have a flexible balance sheet where we can sort of grow and pursue opportunities as well. And so in some ways as the Board looked at the dividend it was as much of kind of the current environment and sort of profitability as well as just protecting the company as well. So all these factors.

Michael Webber

No, that make sense. Just to follow-up on Hanjin for a second, I think - and just to make sure I'm not confused. The three Hanjin assets are not included - there no revenue included for those assets within the revenue guidance correct?

David Spivak

There is small amount in one of the vessels, but all three of them have been sort of chartered for early Q2, which is basically at some point during April.

Michael Webber

Great. So I'm trying to drive up or trying to make sense they're not included in the revenue guidance, but they have all been chartered out on a forward basis for up to a year starting in Q2. But then it does - it also seems like there is still - you're kind of still looking for appropriate charter hire for your lending base.

So I guess my question is, is there is something within that charter structure that keeps you from recognizing in revenue? And then I guess subsequently where is the threshold for what is deemed to be appropriate charter hire that 12 month charter does not let that build.

David Spivak

Yeah look I think the reality is and Gerry can get into the charters, but I think the economic sort of rationales, we wanted to sort of charter for a period of up to 12 years. And so that was sort of vision it wasn't driven at all by sort of the lenders. The lenders have actually been very reasonable this was not sort of contentious the loan-to-value of these vessels is well below 100%.

And so realistically this concept of acceptable replacement charter it’s just - it’s something that we don't expect any issues regardless of how things sort of play out. These lenders were actually very straight forward to deal with. So I think we're really looking at just from a business perspective what is the best commercial way to sort of deploy the vessels.

Michael Webber

Okay. Just Gerry just one for you and I'll turn it over, obviously pretty pivot here, but one that could kind of help you all in the space or to move passed Hanjin, which is continuing to kind of through - kind of ripple through the space. When you look at the liner complex today, we’ve seen some quasi-consolidation and then some actual consolidation.

But I'm just curious are there any without naming names do you think another Handai [ph] like restructuring is feasible in the next 12 to 18 months. And we take kind of Hanjin in that kind of mess off the table. Something more orderly where we see another data point around tangible counterparty risk do you think how realistic you think that is over the next 12 to 18 months?

Gerry Wang

Hi Mike. I think Q4 was a very good quarter and that trend has continued for Q1. And the rate increase is starting from March 1st, pretty much in the graphs. And looks like Trans-Pacific [ph] has experienced the best volume for the year 2016 was a record year for $14 million coming to North America.

I think that takes up a lot of pressure up off the shoulders of some of the smaller operators. I do not anticipate anything of the nature of the restructuring like HMM or Hanjin Shipping in the near future. And I think generally speaking the industry has come to expect some profitability. And some period of stabilization will prevail and hopefully it’s about time to make some money.

Michael Webber

Got it. Okay, I will stop there and turn it over thanks for the time guys.

Gerry Wang

Thank you.

Operator

Thank you. Our next question will come from the line of John Humphries with Bank of America. Please proceed.

John Humphries

Hi, good morning gentlemen. I just want to start with the new builds that you have that were built without charge. Could you talk about how negotiations are going for buying charters for us?

Gerry Wang

Yeah we have two new builds with Y2J which was originally scheduled for delivery during 2017 that have been deferred for delivery to 2018 with our option to take delivery earlier if we want to. So whether we will practically do as to shock them for charters, if the charter doesn’t makes sense then we just take deliveries as needed. Otherwise we just sit on them and see how things go for the year and be prepared to take deliveries of them for the year of '18.

John Humphries

Okay, great. And second kind of back to where we have touched on before on the consolidation that's expected later this year, how do you anticipate where you see the market going changing negotiations with liner companies? I mean what can we expect as far as leverage with the industry and how that will shift.

Gerry Wang

On the consolidation of the liner industry our opinion is helpful for our business because our counterparties are becoming stronger by working together. We don’t see any fundamental change in terms of our ways of dealing with the liner measures because at the end of the day they still operated independently not even stay in the alliances, star alliance, global alliance as well.

Our customers are finally seeing some profits coming to them, as I said Q4 was good and Q1 momentum continues and we expect the ‘17 to be pretty good and we’ll see some hopefully recovery in the charter market coming to benefit us. Because the current level for the Panamax vessels the rates are just not sustainable. And on the other hand we’d continue to push more Panamax vessels to the scrap yard, which is healthy thing for the industry generally speaking.

John Humphries

With that consolidation could the argument be made that they have more leverage over you and are not able to keep rates depressed for longer if you have fewer customers you are dealing with that are in a stronger position?

Gerry Wang

No I just said the alliance is simply organizations they are not for the ownership. So we stick with individual charters per say.

John Humphries

Okay, great. That’s it from me thank you.

Operator

Thank you. Our next question will come from the line of Chris Wetherbee with Citi. Please proceed.

Chris Wetherbee

Hey, great. Thanks good morning, guys.

David Spivak

Good morning.

Chris Wetherbee

I had a question on your thoughts on scrapping as you sort of move through 2017, I guess it’s maybe two-fold. So when you think about the Panamax shift that you have left and I think you talked a little bit about potentially scrapping not selling for competitive purposes. And then you think about sort of the value that you’re carrying some of these vessels? Should we be thinking about the potential for incremental losses on some of these sales or do we think about write downs? David you talked about write downs for 2016 do we have some guidance for ‘17 is that something we should be thinking about any help there would be great.

David Spivak

Sure I think when we sort of look at sort of scrapping and given example I think on page six that short-term fleet the average age is 11 years. We have five vessels that are 15 years old. And if we were to scrap those fives, some are coming up for dry docking some sort of dry docking last year that would reduce that average age to about 10 years.

Those vessels are carried on our books probably at around $25 million apiece something like that. So realistically we were to go dispose those five vessels you would have about $100 million loss. I think as far as the impairments we just went through the year-end process we did go through and test all the vessels kind of in the current environment and we have sort of the incremental for Q4 about $82 million impairment.

I think if rates stay where they are I think we would expect kind of in the back part of 2017 to have some other impairment charge. It’s not something that we can really sort of give quantitative guidance on now. I know historically the company gave guidance well in advance for kind of the first set of impairments, but we just really went through this process just based on current conditions. So I wouldn’t want to try and put a number out there for the end of the year.

Chris Wetherbee

Okay, all right no that’s very helpful in the long-term carrying value. My second question just sort of thinking about post sort of the reduction of the dividend now you guys might be thinking about deploying capital. And I think you guys talked a little bit about being opportunistic and maybe seeing if there’s partnerships that’s out there.

I don’t know if you could give us any more color on that and maybe specifically in terms of the timing. Do we think that there 2017 is sort of deleveraging year when you sort of look internally to continue to do work there from a leverage perspective? Or could we see you move that quickly into the market to do something opportunistic or we may be thinking about that in 2018 or 2019?

David Spivak

I think a lot of the deleveraging occurred in 2016. When you actually really look at from the end of 2015 to 2016 the leverage did come down. We paid off actually a lot of secured bank debt and especially kind of the next few year maturities. I think that we're in a position where we can do both. I think we want to maintain the strong balance sheet so capital structure front in the center.

But the same point we have very good track record of raising capital, we did do two financings in Asia in 2016 and in our minds that was sort of strategic to kind of build out that investor base. We continue to think about broadening that on a global basis. And so I think we want to be in a position where we can capitalize on growth, and whether that's creatively through partnership or just direct I think we feel comfortable that we can do both.

David Spivak

Chris to add on what David is just said, we actually see a lot of opportunities distressed opportunities in the landscape. So at the end of the day as I said in the opening remarks, we'll be selective, we'll be careful, we'll do the right things at a time. So 2017 would be an interesting year and we'll see what happens I try to say it again we want to stay disciplined and at the same time we'll always focus on taking advantage of the distressed opportunities during that down cycle.

As really part of the M&A we want to grow as to down cycles to grab the right assets at right value and build our long-term contract backlogs that's the business model we are not going to deviate from.

Chris Wetherbee

Okay, that's very helpful. Thanks for your time this morning guys I appreciate it.

Gerry Wang

Thank you.

Operator

Thank you. Our next question next question will come from the line of Noah Parquette with JPMorgan. Please proceed.

Noah Parquette

Thanks. I want to ask about vessel OpEx I think it came in 46.5 and you've guided 50 to 53 last quarter, so that's a pretty good number. What allowed you to achieve that level, what exactly did you guys focused on? And I guess what allowed you to do it in this quarter? And going forward how much of that can be captured in the future?

Gerry Wang

Well what has happened is we've put a focus on cost control slogan within the organization. The market is what it is we have no control. But we have to put our hands on things within our control the expenditures related to the crew members, the insurance, the spares, lubricating oil, G&A which make up for the operating cost. And we actually has made good progress in all those areas the crewing costs has come down.

Our chartering cost for the crew members has especially come down through consolidating working together with our charter agents and doing bookings for our crew members ourselves. Lubricating oil contract prices come down as a result of negotiations, the insurance cost has come down primarily because of strong operating performance.

Just to remind you last year we carried 9 million, 10 million boxes we did not lose even for several years in a row we did not lose even 1 box a perfect record. So all of those have combined led to the reduction of operating cost and we believe that trend will continue into the year 2017. And we'll be working very hard in this regard to save money wherever whenever possible.

Noah Parquette

Okay, that's great color. And then I wanted to follow-up on scrapping question and then kind of the opportunity in the Panamax sector. Obviously you got rid one vessel you have a few others that would meet that criteria. I guess what do you see in terms of market upside here? I mean is this a question of renewing the age of your fleet? Do you think there is opportunity here or are you exiting this sector.

Gerry Wang

Well this is the combination of both reducing the age of fleet and also some distress opportunities available for us. The Panamax sector especially for 4250 TEU original designed by Seaspan has been the wood cause for the industry for many years. As I said in the opening remarks just the issue has been just too many that were ordered. And also with the cascade impact from the larger Panamax vessels the 4600 TEUs and the 5000 TEUs coming from the old Panama Canal trade have come flooded the Panamax sector.

So, that sector is going through the demand supply cleansing at the end of the day we are seeing more scrap in this regards simply speaking a lot of owners just cannot afford to go through the special sort of dry-docking spend another $2 million, $3 million to keep the vessels in the working conditions. Remind you the operating requirements today are much tougher than before.

Unless you know what you are doing and also you have the financial resources to keep the vessels up to the environmental and operational requirement, the vessels will not be able to come back to the market again. So as scrapping continued with a demand stand at the same level or increasing depending on the choice we see the balance to come back and then will hopefully the charter rates for the Panamax vessels will be restock to remind you not long ago during the year 2015 the Panamax charter rates for 4250s were in the neighborhood of $13,000 to $15,000 a day.

As I put in the opening remarks $1,000 [ph] in opportune spot market would translate to approximately $10 million of incremental earnings to us, imagine $10,000 to $15,000 per day. We are not dreaming about it, but at least that we are hopeful the market will stabilize and trade at such a levels.

Noah Parquette

Okay. And then just really quick following up on the carrying value, did I hear you right that you have the 15 year old Panamaxes are roughly around $20 million, $25 million carrying value?

Gerry Wang

That's correct.

Noah Parquette

Okay. And then you guys just went through the process of revaluing the carrying value can you talk about what assumptions used to maintain that or just a piece of scrap?

David Spivak

I think the reality is there is you go through this sort of undiscounted cash flow analysis versus determine whether to impair. So you kind of look over the remaining life and there is a future charter rate that you used. And in our case it sort of blend of sort of historical averages as well as some forward-looking numbers that are sort of published. And as you go through kind of projected operating cost, inflation and all of that staff and you come up with a number.

And if the number is above your carry amounts then you don’t impair. If the number is below your carrying amount than you do a sort of present value calculation. And it’s standard across the industry, people’s assumptions may differ here and there. And so, in determining sort of what to impair and we impaired 16 vessels in 2016 those would have vessels that sort of were the numbers kind of worked out to actually do the present value calculation. So, hopefully that sheds a little bit light.

Noah Parquette

Okay. So, it’s like the remaining life is 30 years or a little less than that long-term numbers - long-term rate?

David Spivak

Yes, that's right.

Noah Parquette

Alright. Thanks.

Operator

Thank you. Our next question will come from the line of Kevin Sterling with Seaport Global Securities. Please proceed.

Kevin Sterling

Thank you and good morning Gerry and David.

Gerry Wang

Good morning.

David Spivak

Good morning.

Kevin Sterling

As you think about the opportunities that you’ve talked about do you see more second hand vessel opportunities, acquiring second hand vessels at may be discounted prices or maybe buying some newbuild or ship building lots that might become available?

Gerry Wang

Both, even though our preference would be on the newbuilds and the margin vessels, the vessels either left by distress owner at the shipyard or the owners that have those vessels with the contracts attached they are going through financial distress.

Or even liner measures they are looking at sale or leaseback and even some existing Chinese financial leasing companies going through their internal restructuring given the challenge they faced on the ForEx and also their continue requirement for more operating accounting treatment.

So we have seen basically everything and so we’re actually quite excited by the distress opportunities in front of us it was the reason reducing the dividend just to have more fire power ammunition in our hands to grow our business through this down cycle.

Kevin Sterling

Thanks, Gerry. And I know you guys talked a lot about scrapping this year and accelerating the scrapping particularly the Panamax vessels. Do you have a targeted number you want to scrap or is it just kind of as we go along as you see opportunities you will scrap? I was just curious if you had a targeted number in your mind of number of vessels you want to scrap?

David Spivak

It’s a - as Gerry said, it’s a bit of a balance between sort of offence and defense. I think if you look at what we did in 2016, we scrapped two 13 year old 4600s, where we didn’t like the design so there is a sort of a business reason for that. But we acquired four younger vessels and so I think this concept of sort of buying young sort of selling old modernizing with sort of little out of pocket cost is something that is very interesting that opportunity doesn’t come up too many times when you think about it.

But I don’t know that we really want to sort of pin down a number, but whether - as you get older in the fleet those are sort of natural candidates, especially as we’re getting close to dry dockings. So I think that exemplify isn’t a bad example, it could be a touch higher really sort of depend. So we want to maintain a footprint, we may sort of bring it down a little bit, but it’s something where we want to sort of modernize and frankly our clients want the vessels. So it’s part of a broader business strategy.

Kevin Sterling

Got you. Thanks David, that’s very helpful, appreciate that. And lastly I guess along those lines of accelerated scrapping, how should we think about dry dockings expense this year? Could we see this come down particularly as you scrap some of the older vessels. So maybe help us as we think to help us walk through and talk through how should we think about dry dockings for the year?

Gerry Wang

Kevin generally speaking I give David the opportunity to talk about the CapEx for dry dockings generally [ph]. But generally speaking yes the docking costs have come down and we have been able to negotiate very hard with the ship repairs to go through the special survey and the dry docking requirements for our vessels that’s just a general trend. David do you want to talk a little more about the - our plan spacious survey in dry dockings.

David Spivak

Yeah, I don’t have a specific number as far as what we excite for the year kind of an annual guidance for dry docking. But look I think the reality as we think about sort of the Panamaxes and scrapping I think the economics are impacted by capital expenditures on vessels. And so it’s a consideration, but frankly in many cases it’s also the commercial element that drives the decision making as well. And working through the vessels the operating characteristics and a lot of other factors it’s not just about dry docking or counting or anything like that.

Kevin Sterling

Okay, Gerry and David, I really appreciate your time this morning. Thanks a lot and best of luck to you.

Gerry Wang

Thank you.

Operator

Thank you. Our next question will come from the line of Fotis Giannakoulis with Morgan Stanley. Please proceed.

Fotis Giannakoulis

Yes, hi gentlemen and thank you. I would like to follow-up on the new buildings, you mentioned Gerry that you have postponed the delivery of the unconstructed new buildings. Can you give us what is the remaining CapEx and how much of this remaining CapEx is covered from debt financing? And also is there are any contingencies on drawing down this debt financing?

David Spivak

Yes, I think on the two 10,000s new builds, I think the remaining CapEx is about $150 million on those vessels that sort of due when they are delivered. At this stage we haven’t even look to sort of put financing in that. I think as far as the financing a lot of that will be impacted by the charters that are attached those vessels. And I think in the lane 2018 but having the flexibility to sort of accelerate into 2017, I think we're letting really the chartering decision sort of dictate the timing and from that and I think we would sort of look at putting some secured financing against it.

Fotis Giannakoulis

Thank you. And you mentioned that you think that the market is very close to a turnaround point. I was wondering how long do you think it's going to take to see charter rates moving higher and how low the idle capacity has to drop before we start seeing the inflection point in the charter market?

Gerry Wang

Yes very, very good question, that's the question I asked myself. How long it takes before the charter market recovers. And generally speaking there is a lack the correlation is there, but generally speaking there is a time lag. Sometimes three and the six month, but one thing I can say categorically with most cutting happening with the recovery of container shipping industry as a general backdrop. I think could be Panamax rate of recovery is just a matter of months, we'll see what happens.

Fotis Giannakoulis

Thank you very much.

Gerry Wang

Thank you.

Operator

Thank you. [Operator Instructions] Our next question will come from Mike Gary [ph] with Janney. Please proceed.

Unidentified Analyst

Can you guys talk a little bit about maybe off day kind of what you're looking here for the first quarter compared to I guess the last two quarters should that number get smaller or bigger kind of what you're thinking there?

David Spivak

The - we don't really give guidance on something like that. But generally when we give guidance we’re pretty conservative when we actually approach it. What I would say is that if you look at Q3 and Q4. And I think it was noted in this sort of the speaking notes is that the number of off charter days from our vessels operate in the short-term market were identical despite the fact that the number of vessels in the short-term market actually increased in Q4 versus kind of Q3.

And so our utilization has been good. And I think it's really due to the relationships and sort of the hard work of our commercial team. But it's something where we have been utilization but inevitably there will be off charter days because the charters generally tend to be shorter and there is sort of down time between charters.

So we'll see how it sort of plays out, but when you actually cut through it realistically just from a revenue perspective. The rates on Panamaxes are so weak right now that when you get into sort of revenues the off charter days isn't the big driver of revenue when you really get into it.

Unidentified Analyst

Okay. And then on the separate area kind of the on the hedging and the swaps. Did you unwind any swaps here in the fourth quarter or was that just related to some of the debt repayment?

David Spivak

In the fourth quarter there may have been a very small sort of unwind, but is a very small notional I think realistic what's happened is as we have paid down some debt probably more in Q3. We did sort of pay down pro rata swap associated with that facility. And I think some of that's what’s sort of rolled forward into Q4.

Unidentified Analyst

Great, thanks.

Operator

Thank you. Our next question will come from the line Gregory Luis with Credit Suisse. Please proceed.

Joe Nelson

Good morning gentlemen this is Joe Nelson on for Greg today.

David Spivak

Hi Joe.

Joe Nelson

Just one quick one from me, I mean in the Panamax sector you guys made some comments today about being out there and seeing opportunities. I mean you’re seeing estimates that the market might be oversupplied by as many as maybe 100 Panamaxes. I'm just curious as you think about the opportunity side of how many assets maybe available. I mean is there a number you think or a percentage of that excess capacity that might be up for grad so to speak?

Gerry Wang

I think the 10% is about right, which is about 60-80 vessels need to be scrapped before the demand-supply balance will be restored. It’s hard to pin them that how many vessels will be available for us to acquire. Frankly the prices have gone up and we have put in bids several times the spot value unfortunately for the last three four times we’ve been unlucky. And so there’s more confidence and interest in second hand Panamax vessels now and the Chinese have been active buyers.

And some other historical ship owners they’re just looking at this asset class as well. So there’s more competition right now. So we’ll see how things are go. Again we’re happy with the number of Panamaxes we have, and if opportunities are there to modernize our vessels, buy new ones and trade the older ones with a minimum cost we would do it otherwise we just sit and wait and focus on the other opportunities.

Joe Nelson

All right, sounds good. Well thank you very much for the time today.

David Spivak

Thank you.

Operator

Thank you. There are no further questions in the queue. So now at this time I would like to hand the call back over to Mr. Gerry Wang, Chief Executive Officer, Co-Chairman and Co-Founder of Seaspan Corporation for closing comments and remarks. Sir?

Gerry Wang

Thank you very much for taking the time with us. As I said in the opening remarks we’re going through the challenging times the industry is turning around a little bit but at the end of the hopefully the charter market will see some recovery and improvements in the charter rate. And we made the decision of reducing the dividend for both defensive and offensive play whether for the long-term value of shareholders, the franchise has never been as strong as where we are today.

And we’re going to have a very interesting year for 2017 as the industry is going through sort of the pivotal stage of the changes. And we’re well positioned and continue to drive down our costs and hopefully the market for our Panamax vessels will turnaround as well. And we look forward to working with you and thank you again for your support for our franchise. Thank you very much.

Operator

Ladies and gentlemen thank you for your participation on today’s conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.

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