Seaspan's (SSW) CEO Peter Curtis on Q3 2017 Results - Earnings Call Transcript

Seaspan Corporation. (SSW) Q3 2017 Results Earnings Conference Call November 1, 2017 9:00 AM ET

Executives

David Sokol - Chairman

David Spivak - CFO

Peter Curtis - EVP and COO

Analysts

Gregory Lewis - Credit Suisse

Ben Nolan - Stifel

Noah Parquette - JPMorgan

Kevin Sterling - Seaport Global

Chris Wetherbee - Citigroup

Michael Webber - Wells Fargo

Mike Gyure - Janney

Ken Hoexter - Bank of America

Fotis Giannakoulis - Morgan Stanley

Operator

Welcome to the Seaspan Corporation Conference Call to discuss the financial results for the quarter ended September 30th, 2017. Hosting the call today is David Sokol, Chairman of Seaspan Corporation, Peter Curtis, Executive Vice President and Chief Operating Officer and interim Chief Executive Officer and David Spivak, Chief Financial Officer. Mr. Sokol, Mr.Curtis 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 third quarter 2017 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, 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, 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 presentation slides.

I will now pass the call over to David Sokol, who will discuss the recent developments.

David Sokol

Thank you, David. Good morning. Before reviewing our Q3 results, I would like to update you on our CEO transition. We are very pleased to announce that we have recently hired a very seasoned Executive Mr. Bing Chen, who will formally start as President and Chief Executive Officer of Seaspan in early January 2018.

Mr. Chen has a highly accomplished and diverse range of executive level business experience and a wealth of senior contacts, relationships in our key markets of Asia, Europe and North America.

The cultural understanding and asset management skills that Bing brings to Seaspan are an excellent compliment to our leadership team of Peter Curtis, our Chief Operating Officer, Mark Chu our General Counsel and David Spivak, our Chief Financial Officer.

I have developed genuine respect for Peter, Mark,David and their teams these past four months and I believe that coupled with Bing Chen’s life cycle asset management skills we will have a strong team leading us into the future.

And at this we would like to thank Peter Curtis for taking on the role of Interim CEO until Ben is able to join us in early 2018.

I’ll now turn the call back to David Spivak.

David Spivak

Thank you, David. Please turn to slide three of the presentation. During Q3, we continue to operate our business efficiently, expand our fleet under long term charters, and generate solid financial results.

Quarterly results continue to improve, therefore utilization for the quarter was 98% excluding the four panama vessels that we saw. We continue to aggressively manage ship operating costs which were $5,569 per ownership day for the quarter.

Normalized EPS was $0.18 for the quarter versus $0.17 in Q2 of this year and $0.15 in the first quarter of this year. We extended our fleet under long term charters. During Q3, we took delivery of three 11,000 TEU vessels on 17-year bareboat charters to MSC. We also entered into a three year time charters with CMA CGM for two 10,000 TEU newbuild up of schedule delivery in the first half of 2018.

We also took additional steps to strengthen our financial flexibility. Our net debt to equity ratio was 1.5 times at the end of the quarter. In October, we issued 80 million of 10-year unsecured bonds and used the proceeds to repay secured bank debt. We currently have 19 unencumbered debt free vessels ranging in size from 3,500 TEU to 9,600 TEU.

Please turn to slide four where I will provide a summary of our financial results. Revenue decreased in Q3 2017 by $13.9 million from the same quarter of the prior year. The decrease was primarily due to lower charter rates for vessels that are currently trading in the short-term market, that were previously on long term charters. These decreases were partially offset by the delivery of the 3 MSC vessels this quarter as well as full quarter impact of vessels delivered in 2016 and 2017.

We had 254 days of unscheduled off-hire in Q3 primarily due to off-charter days for 4250 TEU vessels. 94 of the off-charter days relate to the four vessels that were sold.

Ship operating expenses were $45.4 million, a decrease of $3.2 million from the same quarter of the prior year. This is despite a 4.5% increase in ownership days from Q3, 2016. As a result, Q3, 2017 ship OpEx per ownership day declined nearly 11% compared to the same quarter of the prior year.

General and administrative expense was $14 million, which is an increase over Q3 2016. The increase was primarily due to over $6 million of non-cash stock compensation related to the issuance of 1 million common shares to the Chairman of the Board during the quarter.

Total non-cash stock compensation for the quarter was $8.5 million. Operating lease expense was $30.3 million in Q3, 2017 an increase of $6.5 million from the same quarter of the prior year. This increase was due to the full-quarter impact of operating lease expense for four operating leases entered into during 2016, and one operating lease entered into during Q2, 2017 for the YM Wind.

Normalized EPS diluted declined versus the same quarter of the prior year due to lower re-chartering rates, higher operating lease expense and an increase in dividends on preferred shares which was partially offset by the benefits of lower ship operating cost and lower hedge interest expense.

Adjusted EBITDA for the third quarter of 2017 was approximately $125.1 million, a $23.3 million decrease from the same quarter of the prior year; cash available for distribution for the third quarter of 2017 was approximately $65.1 million, a $25.3 million decrease from the same quarter of the prior year. The decreases in both metrics were primarily attributable to lower operating earnings and the loss of bareboat charter revenue from the four vessels sold to MSC in Q4 of 2016.

Our cash balance at the end of Q3 2017 including short term investments was approximately $309 million. Total borrowings increased slightly by approximately $31 million during the quarter, which was primarily due to the final draws on the capital lease facility were three 11,000 TEU vessels that delivered in the quarter partially offset by repayments on credit facilities.

Shareholders equity increased during the quarter primarily due to retained net income and the issuance of common equity under our ATM program which raised slightly over $16.4 million of gross proceeds. Equity also increased due to the purchase of common shares by our Chairman for $6 million.

Please turn to slide five where I will provide some more detail on our capital structure. Overall, we have been very focussed on strengthening our balance sheet by reducing leverage and increasing our unencumbered asset pool. We have repaid over $850 million in secured bank debt since December 2015 and have taken our net debt to equity ratio from two times to one and a half times during that period.

Shortly after the end of Q3, we issued a tenure unsecured bond, the proceeds of which were used to repay secured credit facilities. This repayment had allowed us to increase our unencumbered asset pool to 19 vessel.

We currently have two credit facilities maturing in the next 20 months with an aggregate outstanding balance as of today of $57 million and which were secured by six vessels. Repayment of these facilities would increase our unencumbered assets to 25 vessels.

Please turn to slide six where I will provide an overview of our fleet. The foundation of our business model is the pursuit of long term fixed rate time charters with strong counter parties. The long term portion of our fleet represents roughly 90% of 2018 forecasted revenue with an average remaining short term of approximately 7 years on a TEU weighted basis.

We have 29 vessels on short term contracts expiring by the end of 2018 that represent approximately 10% of our forecast revenue. 24 Panamax vessels, three 10,000 TEU vessels and two 8,500 TEU vessels.

Most of these vessels are chartered below current market rates and provide outside as the current charters are renewed in a better rate environment. As an example, the 24 Panamax vessels on short term charters are chartered at an average rate that is 2000 a day to 2500 per day below current market rates. And those current market rates are themselves at seasonally low levels.

And the current rates on our charters are approximately 3500 to 44,000 per day below broker [ph] forecast for 2018. As well rates under 8500 TEU and 10,000 TEU vessels are well below current market rates with potential outside of 50% to 100% from where they are chartered today.

I will now turn the call over to Peter Curtis to discuss current industry conditions.

Peter Curtis

Thank you David. Please turn to slide seven where I will discuss the current containership supply conditions. As you can see on the first chart, the current order book which is 13.8% of the global fleet is heavily weighted towards ultra large containerships. Approximately 70% of the current order book is comprised of vessels [Indiscernible] 12,000 TEU. And the mid size order book which is virtually non-existent.

The Idle fleet has started to increase as we enter a seasonally low period, however it is important to recognize that the Idle fleet was approximately 8% of the global fleet at the same time last year, and was at about 3% in early October this year, which illustrates the improving underlying market fundamentals.

As we have mentioned in the past containerships tracking in 2016 was its highest level ever at over 650,000 TEU or over 3% of the global fleet. Through September 30, 2017 scrapping reached nearly 360,000 TEU or 1.4% of the global fleet. Scrapping was very high at the beginning of the year but has since declined due to improving industry conditions.

Importantly, approximately three quarters of the scrapping that has taken place in 2017 has been for vessels smaller than 5,100 TEU which is helpful to restore the balance in these asset classes.

Moving onto slide eight, I will discuss recent positive trends on containership trade demand and asset values. The Trade demand growth has increased steadily over the last two years from approximately 2% in 2015 to current levels of approximately 6%. This trade growth has been driven by global GDP growth as well as an expansion in the trade growth to GDP multiple which was forecast to reach 1.7 times in 2017

As we have highlighted previously the improvement in trade demand has been fairly broad across major and secondary trades. This improving demand backdropped when coupled with continued supply, rationalization has led to increased second hand asset sales activity and improving asset values. The chart at the bottom of the page illustrates an improvement of nearly 70% and 4.500 TEU second hand asset values since the beginning of the year.

Improving prices for second hand assets allowed us to sell four Panamax vessels we purchased less than 12 months ago for a gain of nearly $14 million. I will now pass the call back to David.

David Spivak

Please turn to slide nine where I will review our forward guidance. We do not intend to update our quarterly guidance in the ordinary course of communications. For Q4, 2017 we anticipate that revenue will be between $214 million and $218 million. Ship OpEx is expected to be within a range of $46 million to $50 million. We expect our operating lease expense to range between $29 million to $31 million.

Depreciation and amortization is expected to range between $49 million and $51 million. We expect G&A expense to range between $7 million to $8 million consistent with current levels. This estimate excludes non-cash costs related to the retirement of Gerry Wang.

Finally, interest expense at the hedge rate is expected to range between $39 million and $42 million. Note that these amounts are based on current information and estimates, and are subject to change.

I would now like to pass the call to David Sokol

David Sokol

Thanks, David. On slide 10, I’ll quickly go through our key priorities for 2018 and beyond. First of all we intend to maintain our best-in-class operations with a focus on cost management and efficient few utilization on behalf of our customers.

Secondly, we are going to provide and continue to provide innovative technical expertise and solutions to remain the partner of choice to our customers. Third, we’ll continue to strengthen our balance sheet, enhance our credit quality and keeping with that we’ll seek attractive risk adjusted returns on vessel acquisitions and charters and always on a credit positive basis. The last we will pursue to create partnership opportunities during this time of the industry consolidation and rationalization.

Having spend considerable time in these past four months with a large percentage of our customers, I firmly believe that these priorities will make our service even more valuable to our customers as their portion of the industry continues also to consolidate and rationalize.

I will now pass the call back to the operator to open the lines up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Gregory Lewis with Credit Suisse. Your line is now open.

Gregory Lewis

Yes, thank you and good morning. I guess first off congratulations on the babybond it seems like a good transaction. Just as David, as you think about positioning the balance sheet going forward, you know clearly in 2018, there’s other than scheduled amortization there’s not much you need to do, but as we look ahead into the outer years like 2019, there starts to be some debt that needs to be addressed. Could you just talk about the goals you have in 2018 for increasing liquidity, increasing run way for the company?

David Spivak

Sure, now fair enough. Look, we sitting on over $300 million of cash today. The current portion of long term debt is about $203 million plus system capital lease repayments over the next four quarters, about $40 million. But realistically, we don’t have much as far as debt maturities in 2018. What we do plan on doing though is you know using some of our internally generated cash flow and raising financing. We’ve talked a lot about unsecured debt and so that’s top of mind to deal with our 2019 maturities, and so if we look at the baby bond, which was a ten year at 7 and in 8, we used the money to repay most of our May 2019 maturities.

And just as a reminder, that facility is the original facility from when the company went public, it used to be a $1 billion. Today, it’s about $27 million outstanding secured by two vessels, a Panamax and a 9600 and that is in the next 20 months atleast in 2019 that’s only sort of bank debt maturity.

And then there is our existing baby bond maturity in April 2019, April 30th where there’s about $342 million outstanding, you know that is not a callable instrument. We’ve brought some back in the market, but I think our intense is you know over the next six to nine months are prefunded, you know possibly buy back some of that in, and you know when we look at it, it’s 18 months away and you know one of the things we liked about this ten year baby bond was it wasn’t too large, we can build up cash in advance of repaying the April 2019 maturity, but and we already have a fair bit of that, but you know I think we are going to continue to chip away. We’re focussed on costs, we do also want to bring down leverage and leverage naturally will come down with the cash flow used to repay debt and amortized debt.

And so, you know we feel that we have a lot of options ahead of us.

Gregory Lewis

Okay, great definitely lot of options. And then just as I was going through the balance sheet, I noticed there is a pickup in deferred revenue, could you just provide any detail around what that is related to?

David Spivak

Yes, and that will be sort of I guess broader disclosure in our 6-K. This all relates to the 17-year bareboat charters with MSC where they are obligated to buy those vessels back at the end of 17 years at a fixed purchase price. Those are financial leases, not operating leases. And so, you’ll notice on the balance sheet we have a gross lease investments, receivable and then the other part of that dual [ph] entry is that we have deferred interest income revenue.

And so, what’s happening is the gross receivable represents the sum on an undiscounted basis of all the payments on those three MSC vessels that we took delivery out of next 17 years of payments. The deferred revenue is the amount of interest income that we are going to recognize over the next 17 years.

We had financial leases in the past with MSC on 4800 TEU vessels where they actually purchased those vessels back at the conclusion of those leases in December 2016 and so it’s similar counting these are now 11,000 TEU vessels and we are dealing with larger numbers, so that’s why the deferred revenue number is a much bigger number than it was in the past when we did financial leasing with them at MSC.

Gregory Lewis

Okay, great. And then a final, I’ll just squeeze another one in. Just as we look at the broader market you know you mentioned there’s definitely some optimism out there about it improving rate environment as we look ahead to 2018. Just giving that expectation of improving market, what is the tenure been with some of your customers about you know wanting to start to fix forward and maybe re-contract early some of your vessels that are even still on contract at this point. Has there been any pick up in that?

David Spivak

You know when you look at it on the Panamax’s, those charters have been between three months to a year. And you know we get request to go out a year. We haven’t had request really to go much longer than that. I would say that we’ve had approaches on the larger tonnage obviously the 10,000 new builds that we are taking delivery of next year. We did the three year charter with extension options with CMA.

We – the market is vcry short of 10,000 so I think we have a couple of 8500 coming up and we’ve been approached with longer tendered charters on that. So I think it depends on the size of the vessels. You know the Panamax is probably still at the year and the larger vessels are potentially much longer than that. So that's -- it's clearly better than it was a year ago that's for sure.

Gregory Lewis

Perfect. Hey gentlemen, thank you for the time.

David Sokol

Thanks.

Operator

And our next question comes from the line of Ben Nolan with Stifel. Your line is now open.

Ben Nolan

Thanks. Good morning, David and Peter. So, I had a couple questions for you. And one just sort of came up on page 10 of your presentation on the key priorities that have a bullet point that says you intend to pursue creative partnership opportunities. I am curious what you envision then in tailing. I mean, is this just sort of operating type situations? Or is that mean charters? Or is it something more broadened and perhaps outside of the box that what we’re used to seeing from you guys?

David Sokol

Yes. It’s Dave Sokol. Well, I would say it’s frankly potentially all of the above. But realistically what we’re looking and Peter Curtis and I have spend quite bit a time in the last several months out meeting with our customers specifically, but also frankly with the lot of other industry participants including competitors. And I think as you’re seeing the liners both go through a whole series of mergers and acquisitions activity, but also the alignment into the alliances if you well, just as consolidation is happening there you’re going to see continued consolidation at our level as well.

Some force by -- some of the folks that used to be financed in a way that is no longer available to them. And some force by the fact that the alliances are going to require more strength and better operating capabilities out at people. They do what we do. And then – so I think there is a number of different outcomes that could happen. And then thirdly we’ve been pursuing, and Peter’s team has been specifically pursuing relationships with some of our competitors to find ways to jointly purchase various consumables and services that we utilize in greater bulk so that we can benefit from the cost benefits of doing that. So I think frankly we’re going to be looking at all of those opportunities to find short, middle and long-term opportunities to expand our business and to bring our cost structure down.

Ben Nolan

Okay. That's interesting. So, and then secondly I guess, and I have three questions. Any update on how you’re thinking about perhaps the need to reflect those operating leases on the balance sheet at some point?

David Sokol

Yes. Look, starting in 2019 in the first quarter, that’s when we’re required to adopt a new standard that will capitalize operating leases and in our case its really capitalizing operating leases where we’re charting the vessels in from a third-party lessors. And so that will gross up our balance sheet. But we don't think it's going to sort of fundamentally change the business at all. And I guess just a reminder, all of our financial covenants and we’re all comfortably within all our financial covenants.

They're all based on the accounting principle in place with the time that we time those agreements. So the new standard isn't really picked up by us, but we don't really think there is much there, but we will adopt standard obviously in Q1, 2019.

Ben Nolan

Okay. And then lastly from me, sorry to be jumping around like this, but the there was the -- in the quarter there was the one time compensation expense and you outlined pretty well in the release that it was obviously one time event, but there won’t be any further cash or equity compensation. [Indiscernible] so it sort of out of the box a little bit from what were you use to seeing in terms of such sort of normal compensation package. Any color as why it was ort structured in that way?

David Sokol

You’re really rather than it came up relatively quickly and it was a conversation with our board as well as our larger shareholder where some of was needed to step in as Chairman. I said I would do it and offered buy a block of stock and that was the kind of the response from the board which we’ll match that. And then I – at the end of that discussion I said, well then, there shouldn’t be any other compensation for it. And I agreed to stay in his role up to three years if necessary, but really fully intend to turn the company over the management team and the board soon as we can do that. And I think we’re well on our way. But that was – it was nothing more than trying to limit the cash, the cash compensation out of the company and demonstrate that I believe in the future of the business and happy to take on the role in that form, but it was no more to elaborate on that.

Ben Nolan

Okay. All right. That’s helpful. I appreciate it. Thanks.

Operator

And our next question comes from the line of Noah Parquette with JPMorgan. Your line is now open.

David Sokol

Hey, Parquette.

Noah Parquette

Okay. Hey, good morning.

David Spivak

Hi, Noah.

Noah Parquette

Good. I just wanted to ask about the new CEOs, just background on leasing. I’m curious if this is going to results in any sort of change in strategy. I mean, you guys have always done kind of leasing strategy, but if this would be a doubling down on that if you would consider purging some of the other older ships that are more operating vessels at this point?

David Spivak

Yes. It sort of a two part question and I think on some of the broader strategy, David, I think should be best person. I think when we look at kind of just the vessel that we have, the utilization is good. We on these smaller vessels the customers want them. There's very little order book. We’re seeing sort of assets inflation from low levels and we’re seeing charter rate improvement. And we expect that to continue to occur, maybe not be a straight line, but rates and assets values to more normalized time.

So, we’re no rush to exit that and we’re quite comfortable with our position and its part of our footprint in the customers. And the other vessel segment we’re quite happy as well. So I don't think its going to lead to do anything from the fleet strategy perspective, but I think though one thing that being does bring to the table is probably a more disciplined approach sort of managing lease portfolio and sort of institutionalizing those processes. He has done that in other businesses. It's kind of what his background is. And so we have always been thoughtful. But I think another fresh set of eyes and the experience that he brings I think will help require approaches.

David Sokol

Yes. David, I would agree with that. You first, having had the opportunity over my career to step in and help replace number of CEO positions and selected folks. One of the key elements of doing that is to determine what are the strengths of the organization and the skills that are in place, and then what you want to bring in so that you're not duplicating muscles that are already strong, but you're bringing in additional skills to balance out the management team. Our operational team headed up by Peter Curtis, Erik Nielsen and their team frankly are very good.

We’re not perfect. We can make mistakes. But from my energy background experience, watching how they manage these assets, focus on safety, cost control, efficiency, the fact we have an internal design capability to work with our customers to actually maximize the efficiency of these vessels for them. We had a long conversation here in Asia this – today with one of our customers about the right size of ship for some activities that they’re looking at.

So that skill is very strong. It can always be better but we didn’t need to duplicate that. And we have a strong financial and legal team and commercial team, but what things background brings I think A, in addition to just both cultural and language knowledge of the various regions and customers, really strong asset management. And what I would think of from my perspective is the lifecycle asset management skill base which what is that mean?

Well, it mean not only are you analyzing carefully how you enter into these charters and financing arrangements with the customers, but you're also thinking about exactly upfront. How are you’re going to manage these assets after they come off charter? How are you going to maximize their value and make determinations as to re-chartering, putting in place the appropriate mechanisms to gather the greatest amount of information for making decisions on an asset management basis.

And then went to sellers or scrappers or do other things if you will with the business, coupled with a strong recognition that if you're in a leasing business, which is effectively what we’re in and particular if you operating the assets, you need to be really strong at your operational capabilities and you also need to be really capable from a balance sheet perspective. And so I think it will also bring a lot of solid perspective to recognize that. You need to keep the balance sheet as flexible and as liquid as possible in a business that has the kind of cyclicality that this one does. So, to me its kind of a maximizing our existing strengths and then adding a set of skill bases on those muscles as well.

Noah Parquette

Okay, great. And then just one other, and we saw handful of those orders for the 22,000 TEU vessels. A little bit your thoughts on what you think the rationale, what was driving those orders. And if you think there is risk that is more or if you think that’s nice related to that? Thanks.

David Sokol

Peter, you probably have your perspective on that.

Peter Curtis

Sure. Well, we’ve had some good discussions around that. When we have a look at where the particular orders came through in those organizations. I think the rationale was more around ensuring that they manage the unit cost going it on the mainline price compared to some of the other competitors where they perhaps does not have as much exposure. What does it mean going forward?

Well, the order book as it stands with those -- those orders stands with roundabout 13.8% might be 14% through 2020. The first vessel delivers out of that batch will only be late 2019 and continuing into 2020. But I think in terms of changing the dial it’s not a huge. Going through, talking to our plant vessels as David Sokol mentioned we've been doing that in about month.

In general we see cautious optimism. We’ve improved optimism through 2019. In regards to further ordering all of them are very cautious and looking cautious about triggering further orders and are looking in detail as to the correct kind of sizes when would they need them, what are the deployments. Don’t forget we also have the settling down of the alliances to consider as well which create some caution.

Noah Parquette

Okay. That’s all had. Thank you.

Operator

And our next question comes from the line of Kevin Sterling with Seaport Global. Your line is now open.

Kevin Sterling

Thank you. Good morning, gentlemen. As I look at your ship OpEx decline this quarter as you sold off some older equipment. And I think it is roughly $5600 a day. Is that a good number to use going forward? How we should think about your ship OpEx?

David Sokol

If you look at Q2, Kevin and you look at today for Q3, the numbers were very similar. And Peter’s team had done a great job at bringing it down and we’ll continue to manage it aggressively. But looking at it today obviously over time there’ll be at in inflation, but while we continue to be aggressive at managing costs most of the savings have been achieved. And the vessels that we did sale, the four Panamax, that was a bit of an opportunistic transaction we bought them in December. We sold them at 70% gain in August, but it really didn't have any meaningful impact on sort of the OpEx during the period.

Kevin Sterling

Okay. Got you. Thanks, David. And the four vessels you sold I think roughly 37 million total. So the prices you’re seeing today in the market, are they in line with the expectations? And do you expect the secondhand market maybe to continue to strengthen as the underlying fundamentals of the containership market strengthen?

David Spivak

Yes. I think the reality from the time that we sold those vessels values have improved since then somewhat. Roughly speaking at least in the Panamax segment from December vessel values are up around 70%. There is no order book. Utilization is good. There’s underlying demand growth and so while it may not be a straight line through time, those vessels are so far below historical values that you would think that they would continue to strengthen.

David Sokol

I would say, it’s a Dave Sokol. I would say one thing just to be somewhat cautious on how quickly rates will improve in the sense that the supply/demand balance scenario certainly is looking far more favorable than it has for quite some time. On the other hand, I think you have to recognize that as these alliances actually get functioning, there is going to be a period of time where an internal amount of efficiency is identified with how they utilize their combined capacity, because those organizations are now kind of giving it up as a group rather than individually. And so -- and I think we’re going to be somewhat cautious and watch how that unfolds.

I think we should start seeing the reality of all that mid year to late next -- late 2018. So I think the market is definitely rebounded significantly. I would just caution that there’s going to be a period of transition here as these alliances get fully operational and one should be a little bit conservative about how quickly it might shift.

Kevin Sterling

Got you. That’s helpful. Thank you. And last question, as you look at your fleet today and the average age of your fleet, do you -- despite being in the secondhand market selling a few more vessels? Or you kind of comfortable with the fleet that you have today as you kind of look and as you try to balance what you can get in the secondhand market versus maybe re-contracting some of the shorter term charters -- on charters. So I guess ultimately do you plan to sell more in the secondhand market or you kind of comfortable where you are today in the current fleet?

David Sokol

I’d say, we’re probably more likely to be acquiring vessels, several of our customers they’ve kind of given as a bit of hunting license to fill some gaps they have and if we can find the right vessel to put into place with the right charter arrangement, I think its probably more likely we’re acquiring and we would be selling existing vessels in the short-term. Peter if you…

Peter Curtis

Yes. I agree. As David said, we’re seeking opportunities as long as the metrics are right for us where charters may even identify a certain tonnage that they would be interested in and approach us for our interest. That mean this is one avenue.

Kevin Sterling

Okay. Got you now. Good luck big-game hunting and best of luck to you. Thank you.

Peter Curtis

Thank you.

Operator

Thank you. And our next question comes from the line of Chris Wetherbee with Citigroup. Your line is now open.

Chris Wetherbee

Thanks. Good morning, guys. Just want to follow-up I guess on that question, maybe get a little bit more specific towards the 29 ships that are shorter term charters, given what’s going on with rates and where those are chartered relative to the current market. How – I guess two questions, number one, what do you think the upside potential could be in sort of the next year or so as you’re going through that re-chartering process.

And then number two, do you think that the changes sort of thought process around what to keep, what you potentially sell out as some of the older and potentially smaller Panamax that’s come up for renewal? Since that sort of the upside potential list number one and maybe number two, how do you think about sort of ownership of those assets and maybe trading out of it something different?

Peter Curtis

Yes. Its Peter again, that’s a good question. I think looking forward we have to bear in mind the caution that David Sokol was talking about the recovery, the implementation of the alliances of the fleet deployment planning. However what I can say is that if history was any guide to the future. We have through our relationship and do it a very high utilization rate of our tonnage. We’ve had competition stronger than it is today in regards to vessels in an oversupplied market especially in this sector.

And we’ve managed through our relationships to be the ones that have the employment which is naturally an area that we would like to predict. Having said that, looking at the fundamentals where on the one slide we spoke about the improving multiple of container throughput which is real throughput as a percentage the growth of that compared to GDP growth. And we see an improving fundamental there. I think that is a -- it's a reasonable measure to hold some optimism for the near future.

And then the probably the best litmus paper is the improved rates with the liner may just have achieved over the past one year. So we see the utilization of our Panamaxes has been far and wide, very broad usage on many different trades. As the line of measures – sorry as the alliances come into play we will be watching that very carefully if that is a methodology as they continue to use as much as they have recently.

Chris Wetherbee

Okay. That’s helpful. I appreciate that color. And I guess one follow-up just thinking about sort of financing needs and I know you have unencumbered vessels and you’ve done a good job with that. I'm kind of curious, you finished the ATM offering in the quarter and I guess I’m just trying to get a sense of maybe how you think about the equity side of ledgers you look out forward, if there are any equity needs left or they might look like?

David Spivak

Look, I think we’re constantly looking at different financing alternatives and from our perspective nothing assertive off the table. I think we want to be opportunistic. We have been shown a variety and particularly in the debt side probably five different debt alternatives, but I think over time especially as we think about funding growth as well, we want a strong balance sheet and overtime there will be an equity component as well as an unsecured debt component and we will continue the use secured debt as well in lease finance. But I think overall we want flexibility, 19 unencumbered assets is great. We expect that continue to go up and there are really for flexibility. And it something that in time of stress, it's good to have them, you can use them, but in most circumstances you just keep them unencumbered than just flexibility and it just an easier way to fund the business.

Chris Wetherbee

Okay. That’s very helpful. More thanks for your time this morning guys, appreciate it.

David Spivak

Thanks.

Operator

And our next question comes from the line of Michael Webber with Wells Fargo. Your line is now open.

Michael Webber

Hi, good morning, guys. How are you?

David Sokol

Good.

Michael Webber

Hey. Unless this has been going to take over, but hoping that its applicable I guess more strategic questions. It’s all relatively related, but I guess David, I think about the tax rate, the pace of a scale and modernization and consolidation within your customer base. Is that sort of in the growth in size of you and your competitor especially, the value of each transaction seems like its growing at a faster cliffs and can be acuminated by the lessor markets so that the value of risk that involve for a lack of better term of each deal, seems like it’s a bit higher, uncertainty of not withstanding.

But that would be kind of the ongoing game for you all and your competitors with regards to kind of balancing a cost of capital arbitrage and managing residual value risk, it seems like its getting a bit skew towards the backend. I’m curious when you think about the business over a five and ten-year basis, do you think be the lessor market as a whole and maybe an integrated model just for yourself, is better serve separating those platforms in terms of those of market exposure, and kind of maybe bucketing out that residual value risk away from the assets that have really kind of driving the cost of capital that you really need.

David Spivak

Look, we’re large player and we expect to get larger. I think you’ve seen a lot of consolidation on the customer side and that likely will continue. We would expect over the next few years you'll see a lot more consolidation on the charter owner side, whether it's joint ventures, whether it's through attrition as some competitors get out of the business. Whether it's through acquisitions, time [ph] fleets and stuff like that. And so, when you kind of go at the business that way you have to be very strong both with the initial charters and then the residual values whether its re-contracting, whether its sort of disposing and recycling.

I think that's, one thing David Sokol have mentioned kind of in his remarks which is the lifecycle of the asset. I don't think we have a luxury of saying we only want to be in one part of the lifecycle in that. I think -- so we are on operating lessor, the key part of our business and part of that is managing residual value exposure and that's part of what we take on when we provide the service.

David Sokol

Yes. I think as the alliances and that customers consolidate, in the meetings with them the one thing that has been consistent is that over time they expect their utilization, the folks like us to be in the range of 40% to 60%, it kind of depends on the customer, but of their fleet acquisition if you will they expected to stay on group. They come out at around 50%. And that makes sense when you look at their capital expenditure requirements across their spectrum.

From our perspective there could be a lot fewer people doing what we do in the near term just given the realities of frankly how lot of this industry was priced the last 10 years. And the one discipline that we’re absolutely going to have going forward is we only going to do business that makes economic sense and we’re going to take the business, recognizing that we’ve got to manage the assets for the full life of it. And I think it's fair to say that we and others got some of these things wrong overtime.

We should have frankly raise more equity three years ago recognizing some of the realities in the market than we did, but having said that, we’re one of the strongest players in the sector. We intend to continue to stay in the business, but we’re going to do it on a disciplined basis. And frankly I think the liners recognized that they have to expect that they’re going to have suppliers like us that it has to be on economically intelligent basis.

Michael Webber

Great. I ask the question not to re-litigate the past, but just maybe in more l guess less global terms to my first question. If they’re getting – if they’re consolidating and that’s also capital is going down. And you guys as a sector or taking on more residual value risk and your cost of capital is going up, do you think and is it realistic to think that over the next five to ten years your operating platforms will need to adjust their kind of tranche out that risk in order to still have any kind of arbitrage?

David Sokol

I’m not sure, I’d say it that way, I think what’s going to happen is if in fact the liners want to charter in 40% to 50% of their fleet they’re going to have recognize that we do have to manage that whole risk profile. And the while we’re going to strengthening our balance sheet, so that our cost of capital comes down. That doesn’t mean we’re going to be willing to take more residual risk of an unreasonable nature.

Michael Webber

Okay. All right.

David Sokol

So I think it’s going to be – its going to be the normal relationship between customer and supplier and that is we’re only going to do business that is credit accretive from our perspective and their only going to – they’re sign on with this if it's a transaction and make sense for them.

Michael Webber

Okay. That’s helpful. David, one more from me, just a housekeeping question and I thought that we can press this out from the public data, but in terms e of the share count and Jerry’s exit. Have those phantom share has been liquidated as well?

David Spivak

Yes. Mike, I think there were some disclosures when Jerry’s retirement was announced. The amounts that he would receive and settlement for kind of his restricted stock and phantom shares, and I think to liquidate them, I think there was a couple hundred thousands of additional shares that would issue to him. I actually don’t have the numbers, off the top of my head, but it was disclose. It will be in the filings.

Michael Webber

Okay.

David Sokol

Its only a couple hundred thousand.

David Spivak

Yes. Its not much, it’s a couple of hundred thousand.

Michael Webber

Yes. But we’ll get back into it. Okay. All right. That’s helpful. I appreciate it guys. Thank you.

Operator

And our next question comes from the line of Mike Gyure with Janney. Your line is now open.

Mike Gyure

Great. Thanks. Real quick, can you guys update on the future construction cost and maybe the future deliveries schedule for the newbuild vessels still to come?

David Spivak

Maybe on the schedule.

David Sokol

Well, you’re obviously talking about our schedule, correct?

Mike Gyure

Yes.

David Sokol

Okay. We should by in large complete within Q1 of next year. We’ve got another few coming at the end of the year and then the reminder will be within early part of Q1 next year.

David Spivak

So, just on amounts of the final installments for the two 11,000 charters to MSC, those should be about $48 million each, so $96 million in total. And we have a capital lease facility in place to finance that. And then the final installments from the two 10,000 TEU vessels that will be delivered in likelihood in Q1 like Q1, that $75 million a piece or $150 million in total.

Mike Gyure

Great. Thanks very much.

Operator

And our next question comes from the line of Ken Hoexter with Bank of America. Your line is now open.

Ken Hoexter

Great. Good morning. David, just to go back to you revisited the fluidity of the balance sheet. Would you revisit partnerships like you had before with Carlo [ph]?

David Spivak

Yes. Look, we’re open to partnering opportunities, so they can take many flavors, but we look at opportunities all the time and so we would be on two things, we service based on its merits. So it has to make sense for both parties, but we would look at transaction.

Ken Hoexter

And then I guess, I don’t if David or for Sokol, I guess the alliances now that you -- they figured out kind of where they are selling, maybe you can talk a little bit about, is there still opportunity, are they still figuring out what vessels they need or they kind of set now once you get these purchasing for this cycle? I just want to understand where you think beyond that in that buying cycle post the alliances having settled in to their new routes?

David Sokol

Yes. Peter you may augment here. Well, I think first of all it depends on which of the alliances. Quite honestly some are the alliance in Asia is a little more complicated and then you’ve three organizations merging together and so the total fleet alignment between them plus Yang Ming and Hapag is a little more complicated from a visibility standpoint than perhaps the alliance with Maersk if you will.

But I think what we’re seeing is from the large vessels they seems to have made the decision what they think to what they think they need for those primary routes, where, I think its going to take time is to really figure out what the rationalization is between their vessels from Panamax up through 14,000 TEU type ships as to how can they deploy them, can they get greater efficiencies by working together as these alliances and does that eliminate some future demand for a period of time, and I think that’s going to take another probably another 12 months to sort out. I don’t know Peter if you have a different view.

Peter Curtis

No, I think that’s about right. Our conversations with our customers will tend to follow a similar notion that they everybody is thinking very carefully, what should the peak deployment look like. When you are talking about new builds, if you were to start engaging for a new build order now you’re talking about probably 24 months before the delivery of the vessel. So it is fairly long term planning and especially when you are talking about evolving alliance never mind, evolving partnerships within the alliances.

Ken Hoexter

So thanks for that Peter. And do so -- Peter do you see then a break in kind of the earnings [Ph] that you just mentioned, you are kind of wrapping up your deliveries coming into the first quarter. Does that [Indiscernible] focus on the rechartering of the upper ones as rates start to level off and improve or do you start to see another wave of ordering in your discussions?

Peter Curtis

I don’t see a strong wave of ordering or at least you’ll have to persuade that, that’s not what being potrayed to us and discussions with our customers. I think the – part of the story is right now the market rights for second hand tonnage versus the what would be needed to support a new order are not quite in balance they can do fairly well with tonnage in the market as a stance.

But as I say, you know they are thinking two, three years ahead. That’s the thing about new builds. You have to think two, three years ahead. First ship would arrive if we were to sign today, first ship would arrive in two years time, it was a series you are talking about the large shipments in three or three and a half years time. So certainly we do have discussions on what should new tonnage would look like ,what are the optimal sizes depends on the customer, it depends on the alliance which they’re in. So, it is a never ending discussion that’s for sure.

David Sokol

And we are, we have had numerous conversations recently about some new builds with some of the customers, but they are for the most part more niche oriented new builds where they fell off a particular need that they have different capacities of different types, but as far whether this lasts or not I think industries take a while to sort themselves out. But the one thing that I think we have seen is definitely more disciplined about recognizing the need that there is a reality that over capacity is not necessarily very useful for anyone. And then a financially sound industry is important, I think there’s been multiple references to have the U.S. airline industry finally seems to be trying not to shoot itself from the foot all the time, but actually get its capacity right so that people can make reasonable returns and provide better service.

And I’ve been surprised at how often we’ve heard that analogy in meeting wih the customers. So that doesn’t mean that nobody is going to try and compete with somebody else on capacity but it certainly seems a lot more rational and more understanding about the realities of over capacity.

Peter Curtis

I think one of the new answers here as well as several acquisitions have been made, mergers and acquisitions. So those involved are they need some time to digest those.

Ken Hoexter

Yes, absolutely. And David or Peter, have there been any discussions amongst the customers about creating capacity instead of new orders by eliminating some of the extreme [Indiscernible] or is that just the new permanent fact of life for whatever reason?

David Sokol

Permanent fact of life....

Ken Hoexter

I mean it just doesn’t seem like they want to create the capacity by going any faster to – instead of spending the capital in vessels to change that structure that they’ve created?

David Sokol

Yes there is port limitations depending on where they are that faster steaming doesn’t necessarily solved. My sense Peter is that there is just a lot more thought being given to new builds and the recognition of capacity. I mean there is going to be old tonnage that has to be replaced. So I mean new builds are gone, but the discipline in the thought process seems to be about as strong as it’s been for a long time.

Ken Hoexter

Okay. And then David, I don’t know at the beginning of the call if you I’m sorry there was a governance like even there were a couple of conflicting calls, but I don’t know if you talked about being and in the process you went through to select them if you did, I can talk to David offline after the call, but if you didn’t you know did you run through kind of the process as to how you arrived at the new CEO.

David Sokol

I didn’t, but would be happy to basically we kicked off immediately in early August a process of internal identification of potential candidates – through contacts we all had plus board members. We also brought a search for [Indiscernible] and had them do a very broad search and recommendations to us. Frankly, I was very pleased with the responses and the interest that we received almost immediately. We ended up with a very very strong pool of candidates, and frankly the final five finalists that we had it came down to a very difficult decision to be honest. I think what is all said and done we felt very good about the meshing of skills, personality, disciplines that Ben Chen brought to the team and also we got quite comfortable that he was definitely our right choice. Many a times I utilised a number of board members to also interview prospective candidates along the way and you know I was quite pleased with the interest we had, the quality of the applicants and like I said also like Ben just stood out to us as the candidate that had the greatest match of skills.

Ken Hoexter

Great. Appreciate that, infact thanks for the time this morning guys, appreciate it.

David Sokol

And I would say by the way to my knowledge I don’t think any of our board members had ever met our new Ben, I didn’t no prior relationship with a company but after going through the process with him, he really stood out as the right candidate.

Ken Hoexter

Great.

Operator

And our next question comes from the line of Fotis Giannakoulis with Morgan Stanley. Your line is now open.

Fotis Giannakoulis

Yes, hi guys. I want to follow up about your capital structure and ask you after by 2020 when some of your existing charters start rolling over, at what level of that you would like to be on that EBITDA multiple for example or absolute levels of that. And how do you prioritise between de-levering and new acquisitions?

Peter Curtis

It’s a good question. So last quarter we went out with financial targets and focussed in on getting sort of net debt to EBITDA below five times, which were not below five times today. We are hopeful that by next year at some point next year we will go below five times. I think when you look out the more medium term which is around that 2020. I think an ideal goal for us would be to be around 3.5 to 4 times. And that requires some work from where we are today, which is you know using money to pay down debt, it will involve some equity races through time, and you know that’s I think where we are targeting. And I think part of the reason why we are targeting that for this is that, we think one there is a big opportunity ahead of us. You know the turnaround our industry in some ways is a bit of an immature entry. The companies have been around for a while but very fragmented, the container leasing industry has four players that have an 80% market share.

In our case we are the largest share and we are below 10%. But to actually capitalize on that growth you need to have a balance sheet where you can access a broad array of markets in size and you really need more investment grade financial metrics. And so that’s kind of what’s been driving our strategy is to whether investment grade or not by an agency is more operate like an investment grade company, which means we got to get the leverage down and have a lot more flexibility in doing that.

Fotis Giannakoulis

Thank you very much.

Peter Curtis

Thank you very much for your question, which I’m not sure that I answered.

David Sokol

About debt reduction, I think, I think our goal is clearly to get the balance sheet headed in the direction of investment grade on one end and then but we don’t want to limit ourselves from future growth but that growth is going to have to be credit accretive.

Fotis Giannakoulis

Thank you very much both, that’s very clear. One last question, I want to follow up the discussion about the consolidation in the line our industry and how this affect your the bargaining power of the charter owners and if you think the charter owners they can regain part of this bargaining power through similar methods through either consolidation which I assume that part of it will happen with the vessels or they are owned by the banks, but also through cooperation we read there on the trade wins about a joint venture between two of your peers if you would consider over this kind of efforts can be effective or if you would go to even participating?

Peter Curtis

I think ultimately what’s going to have to happen at our – on our side of this equation if you will is just like the liners are becoming more efficient and more consolidated which frankly I think is appropriate as this industry matures and becomes much more technically sophisticated and when you know that people that are shipping containers no longer are willing to have them shipped and delivered within a months timeframe they want it within days or week, you know the technical sophistication of that will take, it’s going to take the liners consolidating and on the other hand our group if you will that the charters are going to have to also be more operationally savvy, more financially sound, so that we can serve those liners. I don’t think that puts either of us at a long term advantage or disadvantage. I think the liners are going to need folks like us and custom [Ph] and some of our competitors to be stronger and more capable and we want the liners to be strong and more capable so that we’ve got better credit quality from a customers perspective.

In the interim will there be a balancing act as to who has the leverage as this unfolds, you know I think that’s true in most industries and it will be true here while I think we view a healthier consolidated industry is better for everybody.

Fotis Giannakoulis

Thank you very much gentlemen.

Peter Curtis

Thank you.

Operator

And I would now like to turn the conference back over to Chief Financial Officer, David Spivak for closing remarks

David Spivak

Thanks everyone for joining the call. We look forward to speaking with you again next quarter. Thank you.

Operator

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