May 3, 2018
Executives
David Sokol - Chairman Bing Chen - President and CEO Peter Curtis - EVP and Chief Commercial and Technical Officer David Spivak - CFO Ryan Courson - Senior Vice President, Corporate Development
Analysts
Michael Webber - Wells Fargo Securities Randy Giveans - Jefferies & Company, Inc. Benjamin Nolan - Stifel, Nicolaus & Company Ken Hoexter - Bank of America/Merrill Lynch Noah Parquette - JPMorgan Chris Snyder - Deutsche Bank Michael Gyure - Janney Montgomery Scott
Operator
Welcome to the Seaspan Corporation Conference Call to discuss the financial results for the quarter ended March 31, 2018. Hosting the call today are David Sokol, Chairman of Seaspan Corporation, Bing Chen, President and Chief Executive Officer; Peter Curtis, Executive Vice President and Chief Commercial and Technical Officer and David Spivak, Chief Financial Officer, and Ryan Courson, Senior Vice President, Corporate Development.
We will open the call for questions after the presentation from management. I will now turn the call over to David Spivak.
Sir, please go ahead.
David Spivak
Good morning, everyone, and thank you for joining us today. Before we begin, I would like to remind you that our remarks and responses during this teleconference may include forward-looking statements.
Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the first quarter 2018 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, 2017 and in the report Form 6-K filed on April 13, 2018.
Our risk factors may be updated from time to time in our filings with the SEC. Please note that we assume no obligation to update any forward-looking statements.
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. We believe that providing these measures helps investors gain a more helpful and complete understanding of our results and is consistent with how management views our financial results.
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 Bing Chen.
Bing Chen
Thank you, David. Please turn to Slide 3 where I will discuss highlights from the first quarter.
During our Q4 2017 call, I laid out the following strategy. First, we will have a laser focus on operational excellence.
Second, we will strengthen our customer partnership. Third, we will actively pursue growth opportunities.
And fourth, we will enhance our financial strength and stability. Operational excellence.
We continue to define our operational excellence by delivering quality service that is reliable, flexible and value added. As we define the industry's best in class service, we carefully balance our ongoing investment impact with the services that underpin our long term commitment to our customer partnership, over the long term gain able win-win operational model for ourselves and our global customers.
Customer relationships. At Seaspan we work to continuously exceed our customer expectations.
As we strive to grow with our customers we measure each opportunity against a set of commercial criteria. Thus, we are very selective about what commercial opportunities we pursue.
We recently completed the GCI acquisition in the first quarter. The GCI acquisition not only passed our economic threshold, but also met our strategic and commercial objectives in strengthening our customer relationships.
Actively pursuing growth opportunities the GCI acquisition is an important strategic acquisition for Seaspan in that it makes a significant milestone in the company's history. The GCI acquired fleet of 18 vessels has strengthened our operational platform reducing our average fleet age and enhancing the composition of our fleet, while increasing our long-term contract revenue.
Importantly, from a strategic perspective, the GCI acquisition also strengthens Seaspan's position in driving consolidation of the containership owner and operator. Financial strength and stability.
During the quarter, we demonstrate our ability to access capital by increasing our financial strength and financial stability. We expanded our strategic financial partnership with Fairfax Financial Holdings as they agreed to invest an additional US$250 million of funding in January 2019 for a US$500 million in total commitment to Seaspan.
While closing on GCI we also closed US$100 million secured financing facility which enhanced our liquidity and financial flexibility. Finally, we entered into two secured credit facilities which provide committed financing for the remainder of our new build program of four vessels.
These four vessels are now fully funded and scheduled for delivery in May. In summary, we laid out a strategy on our Q4 call and we are executing on our strategy.
During the quarter we generated GAAP EPS of $0.37, normalized EPS of $0.13 and adjusted EBITDA of over US$135 million. Q1 EPS was impacted by certain differences in the timing and the prefunding of GCI acquisition by Fairfax.
With respect to timing, we spent about US$2 million on both purchases of stores and spares which will be used throughout the remainder of the year. We also accommodated our customers' requests to advance a number of dry-docks that was scheduled to take place later in 2018.
By advancing these dry-docks we lost revenue which negatively impact our Q1 results. However, we expect to see these impacts largely reversed through the remainder of 2018.
In total, we believe approximately $0.03 of dilution were due to timing and also fleet investment decisions of which $0.02 related to accelerated dry-docks and bulk purchase and $0.01 related to Fairfax's investment in advance of GCI acquisition. In addition, we have also made investments in a number of vessel upgrades and repairs.
Given the short term charter rate development, we believe these investments were prudent and will have sufficient strong paybacks. We view these spends as an investment which allows us to differentiate our fleet and operate at the highest level for our customers, but it does produce a short-term adverse impact to our year-over-year trends.
As an operating principle, we always prioritize the safety, reliability, and flexibility of our fleet when making these investment decisions. As a business principle we always prioritize long-term value creation versus short-term year-over-year trends.
Please turn to Slide 4 where I will discuss the compelling strategic rationale of the GCI acquisition. Before I turn the call over to David Spivak, I want to touch briefly again on GCI given its contributions to our strategy and earnings.
We achieved immediate topline growth from the transaction and increased our contracted future revenue to approximately US$5.6 billion while significantly contributing to our EPS. The transaction expands our integrated platform and enhances our ability to deliver the best solutions and exceeds our customers' expectations.
The expansion of our platform improves our position to drive consolidation amongst the fragmented containership owner and operator and therefore aids Seaspan in achieving sustained level of growth over the long term. In conclusion, GCI reinforces our industry-leading position and demonstrates our executions and our key priorities.
I will now pass the call over to David Spivak who will discuss our financial results for the quarter.
David Spivak
Thank you, Bing. Please turn to Slide 5 where I will provide a summary of our financial results.
Revenue increased by $23.5 million in Q1 2018 compared to the same quarter in the prior year. The increase was primarily due to approximately $9.8 million in revenue contribution from the vessels we acquired from GCI, interest income from the 5 vessels on 17-year bareboat charters to MSC and fewer off charter days related to our vessels on short term charter.
These increases were partially offset by 6 vessels that had scheduled dry-dockings during Q1. Utilization in the first quarter was 96.8%.
Ship operating expenses were $49.5 million, an increase of $3.9 million from the same quarter of the prior year. This increase was primarily driven by an increase of 288 ownership [indiscernible] acquired from GCI and higher repairs and maintenance spending and increased spending on spare parts.
General and administrative expense was $7.3 million in Q1 which was approximately $200,000 lower than the prior year. Total non-cash stock compensation for the quarter was approximately $600,000.
Operating lease expense was $31.2 million in Q1 2018 an increase of $4.6 million from the same quarter of the prior year. This increase was due to a vessel delivery in 2017 that was financed through a sale-leaseback transaction and higher LIBOR rates.
Normalized EPS diluted for the quarter declined versus the same quarter in the prior year primarily due to an increase in our share count, and increase in the interest expense at the hedged rate and an increase in preferred share dividends primarily driven by the increased dividend on our Series F preferred shares which the company intends to refinance in 2018 or 2019. Both adjusted EBITDA and cash flow available for distribution increased in Q1 2018 primarily due to an increase in operating earnings.
Our cash balance at the end of Q1 2018 including short-term investments was approximately $333 million. Total borrowings increased by approximately $1.3 billion during the quarter primarily due to bank debt assumed for GCI and the Fairfax Financial.
Shareholders' equity increased by approximately $134 million during the quarter due to retained net income and the proceeds from the Fairfax Financial allocated to the issuance of warrants. I will now turn the call over to Peter Curtis to discuss current industry conditions.
Peter Curtis
Thank you, David. Please turn to Slide 6 where I'll discuss how our supply rationalization is continuing to reduce available tonnage of containerships.
The industry order book continues to decline as vessels deliver and ordering remains restrained. This discipline has driven the order book to 12.1% of the global fleet which is the lowest level in decades.
The global idle fleet currently spends at about 1.4% of the global fleet and has been in steady decline as we head into a seasonally busy period and as the recent merger settles down and operators and alliances engage their revised tonnage to deployment plans. The total idle fleets of vessels over 500 TEU in size now sits below 300,000 TEU or less than 90 vessels most of which are less than 2000 TEU in size.
The chart on the left hand side of the page shows the very limited supply of available tonnage across a range of sizes between 4000 [audio gap] Their confidence that has enabled us to become a leader in our industry. Active pursuing of growth opportunities.
Given our focus on full lifecycle management of assets and our financial strengths, we are positioned to pursue growth opportunities. We intend to act with patience to capture accretive growth opportunities in order to build and expand the value of our franchise over the long-term.
Capital allocation. As we consider growth we will also consider our balance sheet.
We will be consistently thoughtful and disciplined stewards of our shareholders' capital. I will now pass the call over to our Chairman, Mr.
David Sokol.
David Sokol
Thank you, Bing. Good morning to everyone on the call and thank you for your interest in Seaspan Corporation.
As Chairman of the Board, the reason I'm joining the call today is related to our Annual Shareholders Meeting which was held last Friday in Hong Kong and also have been in association with the two-day Seaspan Board Meeting. During these two days we had excellent discussions with our new Board and the Board and I thought it would be appropriate to outline the Board's discussions and expectations to investors.
This past year Seaspan has made good fundamental progress as it relates to corporate governance, management growth, and financings and we believe is well positioned to create long-term franchise value for the shareholders. The GCA transaction expands our fleet of nearly new 10,000 to 14,000 TEU ships by 18 ships or roughly 20% expansion of our fleet.
This expansion includes $1.6 billion of long term charter revenue. Fairfax Financial Holdings became a major investor in Q1 and we believe this is a very valuable relationship given Fairfax's track record and their attitude of fair and friendly dealings with their portfolio companies.
Bing and I enjoyed the opportunity last week to be at the Fairfax Annual Meeting in Toronto and getting an even closer and developing even closer relationship with the senior management of Fairfax. We significantly strengthened the Seaspan's senior management team with the addition of Bing Chen and Ryan Courson who are already making a real impact on the business.
The Board of Directors has also been maturely strengthened by the addition of Stephen Wallace Lawrence Chin who were recently added to the Board as of last week's AGM. As part of this first quarter earnings call, I'd like to make our investors fully aware of the Board's long-term policies and priorities.
They are, first to enhance our integrated asset management platform to continue growth throughout the industry cycles leveraging our capital allocation expertise. From an operational perspective, we will endeavor to meet or exceed our customer's expectations while leading the industry in customer satisfaction.
The company will at all times remain compliant with all government laws and regulations and conduct operations with due care and concern for the environment while also caring for the safety and security of our employees at all times. Financially, we will prioritize capital allocation as follows: Creating long-term shareholder value, working overtime to reduce our leverage and striving for an investment grade credit rating, and operating our business with a constant improvement mentality and therefore maintaining top quartile operating ratios going forward.
As you are all aware, Rome was not built in a day. Given the shortcomings of our previous senior management team, it was necessary for Seaspan to issue equity in 2017 through our ATM to strengthen and stabilize our balance sheet and credit ratios.
I and the Board believe that those steps were prudent and now when coupled with the significant investments from Fairfax Financial Holdings, we substantially increased the flexibility, strength, and stability of the company while allowing us to grow and make the GCI acquisition. Importantly, the various corporate actions taken over the last nine months have substantially eliminated any ongoing financing risk for Seaspan and has materially improved our financial flexibility and liquidity.
As such, we don't intend to issue any additional common equity in the foreseeable future either through the ATM or through secondary public offering. We would however consider issuing common stock in the future to fund potential acquisitions, but only if such acquisitions were evaluated as accretive to intrinsic value.
As you can see from our share count we did not issue shares in the first quarter other than a small amount as part of the GCI acquisition and we intend to continue to reduce our leverage over the next several years moving towards an investment grade credit rating. As to capital allocation, and the last point I'd like to make is that proper capital allocation requires us from time to time to evaluate how we use our excess available capital in regard to dividend payments or share repurchases.
As a matter of principle when a company shares are trading at a discount to intrinsic value it would be more value enhancing for shareholders for the company to repurchase its shares rather than to payout in a reasonably high cash dividend. We believe that over an extended timeframe most of our shares trade substantially above the current level, or current 6% to 7% cash dividend may be too high and that shareholders will be benefited from us by allocating some portion of that capital towards share repurchases.
We will be evaluating our capital allocation policy quarterly and we want shareholders to be aware of our views. And given these current views, it is therefore unlikely that we would consider any dividend increase in the near future and it is very possible that over time we will allocate more of our excess capital to share repurchases versus cash dividends.
We would intend to update this capital allocation guidance if it changes on a quarterly basis. The overall purpose of the policy guidance we are providing today is to best inform our shareholders on how we intend to manage the business going forward.
We will focus on long term value creation and we will not make any decisions to meet short term quarterly expectations. While we understand that such a policy may not immediately align with all shareholders, we believe it is important for shareholders to understand our long-term strategy and capital allocation principles so that those investors are able to make the most informed decisions for their purposes.
These policies and intentions should be taken into consideration with all of Seaspan's public filings with particular focus on the business risks in accordance with our public disclosures. While we fully intend to create long-term value for shareholders such an outcome will of course be impacted by risks we may be unable to avoid.
As you know many risks in our business are outside of our control. With that, the last thing I'd like to do is, to thank David Spivak for all of his efforts as CFO, while I've been on the Board, I really appreciate his professionalism and support over the last 10-11 months and I wish him all the best in his future endeavors.
While he will be transitioning with us through June this is David's last earnings call, so we really appreciate everything David has done. With that, I'm happy to turn the call back over to Bing.
Bing Chen
Thank you, David. I will now pass the call back to the operator to open the line for questions.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Michael Webber with Wells Fargo Securities.
Your line is open. Please go ahead.
Michael Webber
Hey, good morning guys. How are you?
Bing Chen
Good morning.
Michael Webber
A couple of questions for you David, but I wanted to first just touch on something you just referenced around capital allocation and the increased likelihood of may be buying back stock versus bumping the dividend? There is a lot of context to consider there.
You know the commons are going to be inside of all the recent press issuance as well as the costs associated with the capital from Fairfax. So I'm just curious, one can you maybe frame up a bit more how you look at that?
And then from a metric perspective you mentioned yield would any of it be more accurate way to look at how you think about buying back those units?
David Sokol
I'm sorry, the last part of your question just…?
Michael Webber
Would you look at any of the potentially rather yields just given that you are going to cancel the residual value risk, it's – you know the metric just pretty commonly is the bit, but the question is, you know, one can you give a bit more context around that considering where other aspects of your capital stack are trading and then, two, what metrics would you use besides yield to justify those buybacks?
David Sokol
Yes, definitely yield is not the only piece and I think it is, it's a very good question. Let me take it in pieces.
You know, I think capital allocation for the company is a critical issue and one that perhaps wasn’t focused on adequately in the last several years. So, because of that the company ended up in a leverage position that is higher than we're comfortable with because we want to be – we want to have our balance sheet long-term in a position to go through the cycles and take advantage of both down and up cycles.
So that means that first of all the amount of excess capital will have - that would be available for either dividends or share repurchases was limited and will be - have to be harmonized with our absolute intent to continue to decrease the leverage of the company and move towards a higher credit kind of profile. So I think fundamentally that's an important question.
I think at this point, the amount of capital returning to shareholders is not inappropriate and so the question then becomes, how do we make the decision between repurchases and dividends. I think the reality is net asset value is probably not a good indicator and I think it's certainly a data point, but we view the business as having more value than a net asset value calculation in the sense that the franchise and the operational capabilities and support of our customers definitely has value beyond just the floating net asset value of the ships.
So we would view intrinsic value as higher than that asset value, but that will be the evaluation that the Board has to make on a regular basis which is if the stock is trading below where we think net asset value is we should use available cash when we can to repurchase shares and then maintain a dividend that's appropriate to the business, but not in excess. I think there was an error and this is just again our view, people may well disagree with this, but I think historically this industry tended to be looked at a bit like an MLP from a pipeline perspective or something and in our view that's probably not the way that we look at it.
It was definitely not the way we look at the business and we don't think it's the way people should look at this sector at least the activities that we're involved with. And so I think that tended to move companies in this sector to too high of a dividend profile and then we're looking more at a long-term sustainable business that we can grow and hopefully over time this is certainly not an immediate reality but hopefully overtime add additional skills to the platform that the create better balance for the shareholder.
Michael Webber
When you say scales the platform David, do you mean providing other services or assets to your client base, specifically classes or something like?
David Sokol
Yes, that could be a potential, but also potentially a business that is not directly aligned with the container shipping industry, but that provides a balance to the overall corporation given that we do participate in a cyclical industry. So I think long-term we want to look at growing the business for the best interests of the shareholders on a long-term basis and using capital to create that value.
Michael Webber
Thank you, all right, I'll let somebody else followup on that. I've got one more just around, you know there's been a high level of management turnover, some of that's pretty natural, but you know, David, one, just a bit more color around - I guess may be whether we should expect any more?
And then two, specifically would the turnover and the CFO see if we could get a bit more color around Ryan's background and the process for picking a new CFO and that’s not to pick on Ryan but hiring someone that young with an existing relationship with the Chairman to run the most complicated capital stack in this space kind of warrants a bit more detail and rationale. So also just a bit of color on that process and how would you think about the management team and this kind of being set now versus any additional changes would be helpful?
David Sokol
Yes, I know, I think a fair question. Yes, let me step back and just say that the – first of all Seaspan has about call it 4100 overall employees and they’ve got a really good team of folks throughout the organization.
And I've only had the pleasure of meeting a relatively small percentage of them, but it is definitely a very strong work ethic and good group of people. You know, historically the company was run a bit kind of remote control.
The two senior managers tended to operate out of Asia or Europe depending on where their homes and that were and frankly had very little day-to-day interaction with the overall team particularly in Vancouver and other parts of the world. And you know, that develops a very odd set of dynamics, particularly when they're not hands-on managers.
And I think unfortunately, when I came in last summer it was clear that the overall planning and execution of the business plan was not terribly detailed and frankly in my view not well executed, not because the people didn't want to perform well. I think like I said we've got very good people, but if they are not led and they are not consistently held through a set of standards and particularly when they rarely see the senior managers of the company, you know frankly bad things can happen and less quality performance occurs.
And so I think a lot of the transition, now again I don't want to put David Spivak in a position at all. David came in, in May of 2016 I think very much trying to help solve some of the problems that the prior management team had gotten them into.
And David performed extremely well during that period, but David also made it clear to me late last fall, December-ish that his personal interests were more geared towards the consulting side of finance versus the type of role he was in and he had to write under his agreement to make a decision based on the change in the corporation to exit. And frankly I appreciated his forthrightness and I think we were quite fortunate to have the ability to bring Ryan in, in advance of that transition to get him up to speed.
And I think Ryan is going to be an absolutely critical guy going forward in the sense that this is the kind of role he is excited about. He has got a lot of good analytical background that will help us establish the lifecycle, asset management capabilities in combination with Bing's background, but I think he is very strong.
But also David, I'm sorry, excuse me, Ryan really sees himself as building a very strong platform as CFO, both from a Investor Relations, Treasury, carrying et cetera, we’ve got a fantastic controller in Krista Yeung. And so, I think that team is well set to go forward and I've known Ryan long enough and worked with him in various situations that I think his skill base will mature very rapidly into the CFO's role, because something I think that is important to recognize is that Bing Chen has extensive financial background.
I have a fair bit as well, although I hopefully will be spending less time in those areas than although I'll spend as much time as the team wants. And Ryan has a lot of experience as well for his age but he's not, we're not expecting him to have 30 years of capital markets experience.
What we really need from him is the management and organizational and frankly technology skills to help us utilize the other assets we have. We've got a very strong controller in Krista and so I think Ryan will fit into that mold well.
I wouldn't be surprised if we have what I would call an unusual amount of transition of people throughout the company during this year. No intentions, we don't have any plans on significant layoffs or anything of that nature, but when you go through an organization and get them refocused on a long term plan and reestablish execution, expectations, et cetera, establish accountability and responsibility expectations, there is going to be a certain number of folks leave.
We don't anticipate that at the senior levels going forward, but in the more mid levels of management that you may well see some of that. But frankly that's a healthy process and given all the different acquisitions and activities I've been involved in the past, I think it's a very normal and strong function.
But again, the heart and soul of Seaspan is 4,000 people and 10 or 15 people at mid-level or higher levels transitioning is actually a relatively small number from my experience. So I'm quite comfortable that we've got a good team.
We've got very solid folks operating the vessels and the goal going forward is just to keep getting better.
Michael Webber
Got it. That’s helpful.
I’ll turn it over. Thanks guys.
Operator
Thank you and our next question comes from the line of Randy Giveans with Jefferies. Your line is open.
Please go ahead.
Randy Giveans
Hey, thank fellows. Two quick questions from me.
Looking at the chart on Slide 7, looks like short term rates in the 4,000 TEU vessels are around 10,000 to 11,000 a day. Where do they current kind of one and three-year time charter rates and how robust is that market?
Peter Curtis
Hi, it’s Peter speaking. Yes, you are quite right.
We've seen a good improvement in that the Panamax area. I think really the best way to answer it is, we see the order book which is primarily large vessels.
There are 14,000 TEU and above consist of probably 65% may be 70% of the order book, so these are not competing with the Panamaxes. The trade growth has been across all trade lines into Asia, Africa trade, South America, [indiscernible] areas.
All of them have enjoyed healthy improvements in throughput and that is predicted to full cost up to be around about 5% this year and maybe about 4% next year. Against the background of how long it takes any potential newbuilds in these sort of mid-sized segments which I mean the 4000 to 10,000 TEU areas, for any of those if they were newbuilds it would take until probably 2020 to deliver the first unit.
So we think that there is a good legs left in the charter rates in these areas. We have spoken about the somewhat declines in the main trade freight rates, but if you look at the throughput growth or the demand growth we see that this is - maybe it will be a bit of a headwind, but we still think there's a few years left in this.
Randy Giveans
Sure, and then are you all working on new time charters for the fleets, I guess, a lot of your kind of variability is not many on long term charters there?
Peter Curtis
Yes, that is a prime focus and it's one of the folks as I personally have in terms of the commercial area, we tend to like to work directly with our charters. We've enhanced our face time if you want to put it that way with our customers looking at their needs and trying to get our services at the top of their list.
Randy Giveans
Okay and then with the new $100 million credit facility that was secured in March, is that solely for the GCI acquisition or could you use that possibly to refinance the Series F preferred shares now that that rate is up to 10.5%?
David Sokol
Sure, it's David. We've obviously drawn on that.
It's reflected in our Q1 financials and our cash balances, so that's a funded term loan, so that cash was free to be used in any way we see fit and it's reflected in our cash balances.
Randy Giveans
And then what are the options for refinancing the Series F? I think you said that was a priority this year next?
Ryan Courson
Hi this is Ryan. As we would evaluate any part of our capital structure the preferred series after something that we continually evaluate.
As we've shown in quarter one, we have access to capital across many different medians and going forward in 2018 and 2019 we will evaluate different proposals across different capital markets to best augment our capital structure.
Randy Giveans
All right, thanks Ryan, nice to meet you. Last question just from an operational standpoint, do you expect to install any scrubbers or possibly I guess LNG capable engines with the oncoming IMO 2020 regulations?
Peter Curtis
Yes, it’s Peter again. I’ll deal with the last one first, the LNG side.
That really is not a solution for retrofit, that's a newbuild avenue for a number of frankly cost reasons and impact on a vessel design. In regard to the 2020 sulfur cap, we are looking at scrubbers.
We are looking at the impact of scrubbers on the various designs that we have, but we're also looking at the fuel options, the compliant fuels versus the high sulfur with scrubber option. At the end of the day, with the capital required to do a retrofit on the scrubber that really is going to have to be a conversation between ourselves and our charterers.
We don't buy the fuel. Vessels under time charters the, it's the obligation of the charter to furnish the fuel.
So the investment decision would necessitate that conversation because the benefit of say fitting a scrubber in terms of the cost benefit of what is full costs is to be a lower cost high sulfur fuel would the benefit go to the charterer, so there is a disconnect in the investment strategy. So it's a matter that we have under review and our ideas are maturing, but we're not at the end of that road yet.
Randy Giveans
Sounds good, well thanks for the time.
Operator
Thank you and our next question comes from the line of Ben Nolan with Stifel. Your line is open.
Please go ahead.
Benjamin Nolan
Sure thanks. David Sokol, so I thought it was interesting a few of your comments there about perhaps how you think about the long term evolution of the business and maybe looking to diversify outside of the more cyclical container shipping business.
I know or I believe you have some background with companies like Berkshire Hathaway and so forth. Is that sort of the model whereby you just find a good asset that maybe you can grow with low, at a relatively attractive price and fold that in or is it still trying to find things that are somewhat synergistic with what is part of the existing platform?
David Sokol
Yes, it's a fair question. So yes, first let me be clear.
The diversification comment is merely that's long term. We're not in a position today where that would make sense both from a capital perspective, but also just our management team obviously taking care of businesses that we have at this point.
But my experience has been over the last 35 years that if you run a business well and you allocate capital soundly, you will create opportunities over time for the business to do more than one thing. And I wouldn't – and Berkshire is more of a fund manager I think as I would think of them now.
Certainly we would be thrilled to have the success that they've - even a portion of the success that Berkshire has had, but that I don't think that's a - at this point certainly not a fair model. But I think the other piece of it is just over time being too controlled by one sector is just something that if you can avoid and have more tools in your tool box, the business has a better fundamental stability long term.
But our priority is in the short term to run this business really well, improve the balance sheet, allocate capital with a lot more clarity and discipline, and as we do that I think our opportunities will present themselves over time to both, do synergistic acquisitions which I think is our real focus in the short term, short term being the next year to two, and then longer term using Seaspan to be a significant platform to create significant shareholder value. And I think these intentions are already starting to show themselves a little bit in the sense that even just last year as we openly discussed some of the changes we intended to make in the business, all the sudden you attract interest from long term holders like a Fairfax.
And I think the stability and the long term partnership type relationship Fairfax intends to have with us, the fact that they were almost immediately prepared to step up and help us finance the GCI transaction, those are the kinds of things that happen when you get your - when people understand where you're going and when they know you're focused on long term maintenance of value and growth rather than short term just taking advantage of short term opportunities when they're available. So I think it will pay long term benefits for our shareholders, but it's something that shareholders need.
We felt it was just important for the shareholders to understand how this Board thinks, how its predominant shareholders think and so that people can make appropriate decisions as to whether they view the direction we're taking and the team that we're taking it with as positive or they view that, they want to allocate their capital somewhere else and that's a fair decision for every investor to make. But we I think as a general matter just feel that open communications are important to good relationships with shareholders.
Benjamin Nolan
Right and I’d certainly agree with that. To the extent that you'd mention sort of the near term opportunities that being a little bit more synergistic with the existing container operation, could you maybe or maybe not quantify, but what does that opportunity set look like currently?
I guess how full is the pipeline? And then associated with that, subsequent to the GCI transaction and the financings that have gone with that, what do you or is it possible to maybe quantify what you feel like is your war chest and inability to actually execute on some of the near term opportunities?
David Sokol
Well, I think on the short term the opportunities are consolidation within the sector. I mean one transition that I think is definitely happening is, as you've seen the major liners consolidating over the last several years and then also transitioning into operating as alliances, they are recognizing that the business was too fragmented.
There was too much competition based on market share of capacity rather than competing on quality of service, et cetera. And then when you compete purely on capacity as the aviation industry used to do, you tend to on one hand get more market share which then leads to losing more money.
And I think people are starting to recognize that's not a long term strategy of value creation. Well, that reality which is occurring is definitely going to flow down through the leasing side of - the operating side of the leasing business as we support those customers and it's being pushed for two reasons.
One, available financing for some of the old KG type structures, one off ownerships, maybe three off ownerships, third party operations with unrelated owners, et cetera and then providing services to the major liners, that's still part of the market today, but it's not part of the market that I see. I think you'll see anywhere near the size that it is today.
Today we represent depending on the map between 8% and 10% of the operating charter market. I mean we're by far the largest.
As you look at who our competitors are it drops off pretty quickly and by the way there's some good competitors in there. But for the most part it's a very fragmented sector.
So I think your question as to where are the opportunities, you just have to look at that cross-section of competitors. Not all of which are of interest.
Some of them have very high quality assets and a very good track record, some not so much. And so, I think that's our opportunity level and I don't think, we don't view it as us having a war chest, I think in the near term most of those acquisitions we think hopefully some of those competitors will see the value of joining us and their owners begin interested in joining us as a shareholder.
So I think equity transactions are probably more the likelihood in the short term. Again, just because of our focus on deleveraging over time and but also I think that provides several of our competitors an opportunity to have a more liquid equity base, but also to be part of the platform that I think the major liner customers like which is a platform that they know is going to be around for the long haul and that can support them with the efficiency and characteristics that they're going to be looking for because there's a long road ahead for the container shipping industry.
Global commerce is going to continue to grow and our customers are working very hard to provide their customers greater cost certainty, time certainty schedule certainty, et cetera, and that's going to flow down with their demands for us. And the one off owner, the five off owner just aren’t going to be able to compete in that market very long.
It may take three to five years to see that consolidation really aggressively happen, but that's fine. The last point I would just make there is, you can only make acquisitions with a willing buyer and a willing seller, so you really can't predict win something will come along.
The GCI transaction, I was in conversations with Carlyle for eight months and we finally were able to reach a deal. So then you know, these things you just have to be patient and wait until people's interests align.
But I think the opportunities synergistically is good in the industry and then I think we're well positioned with me and team as the best consolidator in the sector.
Benjamin Nolan
Okay, well that's interesting certainly and it seems to be a little absent in that in your answer there is the opportunity set for new incremental business from the liners and I know there's been handful of developments on that front as recently. I mean is that not as much of a priority in terms of signing up new business on newbuildings relative to consolidating among the existing players?
David Sokol
I think newbuilds are interesting if we can do them at a rate of return that allows us to provide the service that the liner needs. In a market where a lot of people are suffering from prior issues the last couple of years.
There may be competitors willing to do deals at low single digit returns and again capital allocation to me is a critical element of any business and from our perspective well let people take deals that don't make economic sense from our perspective. It may make for them, I can't make a decision for other companies, but clearly when we look at some of the returns people are accepting we just don't see how that works long term and this is a long game.
And so we're fine doing newbuild deals where they make sense. Peter and the team have very strong expertise on the newbuild side.
I don't think there's any competitor out there that is even remotely close to the engineering capacity of newbuilds that we have. But we're only going to do them where we can make a fair rate of return and we were funded at a level that we can long term meet the expectations of the customer and so of course they are of interest, but we'll only do them on the right basis.
Benjamin Nolan
Okay and then lastly from me and I don’t want to take up too much time, but for Peter, obviously we've seen or we do see idle capacity across the fleet pretty low, but yet, the box rates are uninspiring. It would seem as though there's probably a little bit of a land grab going on among the liners and - but their load factors probably aren’t quite high enough to actually get that incremental pricing power and consequently maybe their appetite to add more shipping capacity ultimately drive freight rates is handicapped by their own profitability.
First of all is that a fair assumption and then secondarily do you have any sense of how close we might be to that tipping point?
Peter Curtis
I think that’s when we talk about the loading capacities, et cetera, I think that's probably more something to ask the liners themselves. We see what we have on our own ships which actually is fairly higher.
It has increased the loading factor of the past couple of years. But the way you put it is more or less I think how it is.
I like your word of – your term of land grab. Going back to the fundamentals though, the throughput growth has increased.
It exceeded the growth in TEU capacity out there for both 2016 and 2017. This year the growth in tonnage is about the same as the growth in throughput.
But the order book remains low and we foresee into 2019 and perhaps into 2020 the throughput being greater than the added capacity. So I think we're very much at or close to that point where the demand and the supply are very close to each other.
A lot of the excess capacity was taken up during 2016, 2017 and somewhat into 2018. Maybe there's some thinking of some newbuilds we've seen a few recent newbuild orders, but still the order book compared to the demand growth, actuality demand growth rather than throughput growth as a percentage of the fleet still looks to be very healthy.
Benjamin Nolan
That's very helpful and then I'll turn it over now, but I appreciate the candid conversation there.
Operator
Thank you and our next question comes from the line of Ken Hoexter with Merrill Lynch. Your line is open.
Please go ahead.
Ken Hoexter
Hey, good morning. David Spivak, can I just get you to clarify one comment you made earlier about the dividend?
You said the amount of capital returning to shareholders is not inappropriate right now and then you might decide going forward. So I just want to make sure are you saying at 6% yield you would look to cut it at this level or you’re okay at these levels if the stock goes down then you'd consider cutting?
David Sokol
I think you said David Spivak, I think you meant David Sokol on that one.
Ken Hoexter
Oh yes, it's okay.
David Sokol
Yes, but David. Yes, I think well, let me be clear what I was saying was that the amount of capital that we're returning to shareholders today, I think we feel is sustainable.
The question is, is it in the form of dividends or is in the form of buybacks and I think A, we'll kind of make that decision quarter-by-quarter. And I think it'll be – then I think the intention would be it will be some of both.
And I just don't think of that long term company, in our view if we're better off if we buy stock below intrinsic value that would be a wiser decision than say paying a 6% or 7% dividend in total now. I think also we're believers that shareholders should also have both forms of tangible benefits, but - so I don't think we're - as I said I don't anticipate that dividend going up.
We think the stock, we'll obviously give it time for investors to decide what they think of where we're going. If ultimately the view is by the broader community that it takes a 7% yield to maintain the stock, I think we would view that money would be better used to repurchase shares.
If the dividend turns into a 4% or 5% dividend over time, and I'm not talking about cutting it but by stock price adjusting, then it's a different calculus. I think it's really a quarter-by-quarter decide and then obviously as time goes on we hope to be able to allocate additional capital to that process and in addition to deleveraging.
And so, again I'm really just trying to explain how we would as a Board evaluate where to put that capital. But in either case our intention is certainly for it to be the best interest to shareholders.
And so, but we also think that it's important for us to kind of lay out how we look at this, so that shareholders can kind of decide do they agree with where we're going and those that don't obviously make those decisions and those that do, so that we don't make a capital allocation decision ahead of the market having the full thought process opportunity of what the Board's view is.
Ken Hoexter
Thanks and then how do you make the decision on whether it is dividend or buy back versus de-levering and kind of what targets - you mentioned kind of investment grade over time, how fast do you want to exploit that de-levering?
David Sokol
Well, I've said before that it would be my hope that we can get down below four times within the next three years on a leverage basis and I think that is a priority for us. Ultimately in this business access to capital is a basic raw material and access to capital at competitive rates is critical to that to be able to support our customers long term.
And so I think in the short term because the company's leverage got higher than I would have hoped for that has to be a priority and then once we get well on that trajectory. And we are, one thing I think if you sit and work with David, Ryan and look at how we're scheduled to repay capital over the next several years, I think you'll see significant progress will be made.
But we have to do that and then as excess capital beyond that becomes available we could allocate more regarding shareholders and also acquisitions. But our priority in the short term has to be first and foremost to continue the deleveraging process and then as we stay on track there continue to allocate capital to shareholders.
Ken Hoexter
Great. Thanks David.
And then I guess, actually if I can for Peter, you noted the liners given the new lanes they've established and following the whether it's the acquisitions or the alliances, they've - have you seen in excess of vessels and increase in demand, how is that now that everything is kind of - the shakeout has kind of finalized, they've figured out what ports they're going to, what sailings, how have you seen the change in demand needs? And then just a follow up while you’re answering that, just your thought on investment in the GCI vessels, is there any, you talked about increased dry-docks, is there any additional investment you need to make in the vessels?
Peter Curtis
Well, dealing with the first part which is about the liners and their network deployments, I think the biggest challenge that they really have is with the delivery book which as I've earlier said is predominantly large vessels, above say 14,000 and above is more or less 60% of the book, maybe 55%. And then when you look at 12,000 or above that goes up to around about 65%.
So the very large ships are, the only really deployable on the Asia-Europe trade they are for the long trade, I think on one of the earlier calls we mentioned how one of the liners had actually tested one of the very large vessels on the trans-pacific and the economics didn't work because of the short haul, the shorter haul and ratio of time in port just didn't make sense. And the ability of the North American ports to actually turn one of those vessels around in a reasonable time was quite challenging.
So really what I'm saying is that the influx of the order book is primarily on the Asia-Europe trade and this is where you see the charter rate difficulties that they have especially as they come into the May renegotiations on the major contracts. I don't know if that answers your question directly.
In regards to GCI, those vessels are so close to our 10,000s and 14,000s. There is no docking requirements of those vessels in advance of their scheduled dockings, there's nothing unscheduled in that regard.
Ken Hoexter
Great, thanks for the time.
Operator
Thank you. And our next question comes from the line of Noah Parquette with JPMorgan.
Your line is open. Please go ahead.
Noah Parquette
Great, thanks. I know the call has gone long, so I'll keep it quick.
Peter, the comments about the retrofits were really interesting. One, have you approached charters about that conversation yet and if so can you kind of describe their interest?
And two, the newbuild side where do you think maybe anecdotally or if you’re tracking it, how many ships are having scrubbers installed during construction and how many are just going to be scrubber ready? Thanks.
Peter Curtis
Right, but that's not a very easy question to answer to be honest. Many of the liners have actually been sitting on the fence watching this whole issue.
It's only recently, unfortunately that Friday is the 13th when the IMO committee that governs this really drew the line in the sand to say that they'll be no delay in 2020 and it cannot really set into place the issue of the low sulfur. So in our discussions with our charter base and potential charters as well, there have been very few decisions made to actually retrofit scrubbers.
There are some who have been quite vocal in saying they feel scrubbers are just the wrong way for the whole industry to go. Our friends in Denmark we're quite vocal with that and others have said, well they're going to look at scrubbers on mainline vessels which is the long hauls and not so much on the smaller vessels or short haul vessels.
And then we've seen CMA take a bold step and go with LNG as propulsion or LNG powered vessels as a fuel, where it took them quite some time to fundamentally negotiate and get the contract that assures them of both supply and the cost differential of the fuel. So there's a number of new dynamics that are still coming to bear in the industry in regard to these fuels.
Noah Parquette
Okay, that’s all I have. Thank you.
Operator
Thank you. And our next question comes from the line of Amit Mehrotra with Deutsche Bank.
Your line is open. Please go ahead.
Chris Snyder
That's financing, you guys have been generating lots of cash, no newbuild obligations after this year, so should we expect that these proceeds will be used for growth or kind of help pay down the 2019 debt obligations, how should we think about that?
Ryan Courson
Hey Amit. This is Ryan.
Only about 25% of your question came through do you mind just restating it?
Chris Snyder
No, no problem. This is actually Chris Snyder on for Amit.
The question was around the plans for the second round of the Fairfax financing. I mean, you guys are generating lots of cash, you have no newbuild obligations after 2018 and so should we expect that the proceeds will be used for growth or will they be more to help pay down the 2019 debt obligations, just kind of any color on how to think about that?
Bing Chen
This is a Bing Chen. I think that this is again is a capital allocation question that is very good.
And I think in general our priority is to deleveraging and make sure that debt is repaid as for this priority, and at the same time I think we were also looking at use those free cash flows to look at the growth opportunities. However, whatever the growth opportunities as we stated earlier that we have a very comprehensive criterias for us to meet.
So, therefore we're going to be using this money in a very disciplined way to best deploy them to the best interest of our shareholders.
Chris Snyder
Okay and just a followup, and you guys kind of talked about, at some point maybe diversifying wafer containerships, but it sounds like you want to keep some level of synergies. If you could just make any examples of it now kind of what kind of businesses this would be, I know there's been articles about containership companies and liners getting more into the logistics side, is that something you guys would be interested in, like what just kind of anything you could provide there would be helpful?
Bing Chen
Yes, this is Bing again. I think first of all as David Sokol stated earlier, I think our focus in the short term is staying within the containership operator and owner space, because our market as it is right now is just very fragmented.
The opportunity for companies like Seaspan as the leader in this industry and I think not only today that we have the capabilities to perform such a consolidation role, but also we see as a duty of our customers because as we - our customers business is transforming, they requires their business partners particularly in the vessel owner and operator space to be able to provide that kind of a scale that has the ability to provide the quality and flexibility to them. If we're looking at our space, I think today we’re extremely fragmented, so therefore we see there's a need from a customer side and also there is the advantage from Seaspan's perspective to focus on this sector so that we can provide the kind of solution for our customers.
In terms of the outside of containership space, whether it's logistics, whether it's support, whether it is services, I think we obviously we were looking at this from an opportunistic perspective because I think that that will only come to the material consideration when those are the extraordinary opportunities that fits our business well and also provides our customers with their needed services. In that circumstances, I think we were looking at those opportunities outside of containership space.
Chris Snyder
Okay, that's helpful. Thanks for the time.
Operator
Thank you. And our next question comes from the line of Chris Wetherbee with Citigroup.
Your line is open. Please go ahead.
Unidentified Analyst
Hi guys. This is James on for Chris.
I wanted to ask a question about preferreds and sort of the three-year plan to deleverage, when you look out three years, you know you are targeting something below four, but in that capital stack, how do you think about preferred and some of the other pieces of capital under your structure?
Ryan Courson
Hey, this is Ryan. Like I said earlier, capital structure augmentation is just one of the arrows in the capital allocation quiver.
So from time-to-time we evaluate augmentation strategies, capital markets proposals and going forward that will be the same.
Unidentified Analyst
Okay, actually to, just along that, is there actually anything that we should keep an eye out for that you might do which potentially catered to a particular investor base over the other obviously deleveraging is the net positive, but is there anything that potentially the preferred market might prefer over like any others particular part of the capital?
Ryan Courson
I think the one message we wanted to communicate today was that from a common equity issuance standpoint that's not something that we are interested in, in the foreseeable future, but other than that from a capital market standpoint we constantly evaluate proposals and our platform has access to global capital markets which gives us a wide variety of potential solutions, so I think that should address the broader capital structure question.
Unidentified Analyst
Got it. And the other question I had was, you actually had any obviously, probably had discussions about it, but have you had, gotten any feedback from your customers around the lease changes and how that might potentially impact your business and what the preferred terms around leases would be or it would change their behavior in any way?
Bing Chen
Sorry, could you repeat your question because it wasn’t very clear?
Unidentified Analyst
Yes, coming basically lease accounting changes, have you had any discussions with your customer base around how that might change their preference in terms or other aspects of the whole structure?.
Bing Chen
Okay, yes this is Bing Chen. I think no, the answer is no, that we don't have any conversation or requests from the customers.
Unidentified Analyst
Thank you.
Operator
Thank you. And our next question comes from the line of Fotis Giannakoulis with Morgan Stanley.
Your line is open. Please go ahead.
Unidentified Analyst
Hi guys this is Matt [indiscernible] on for Fotis. Thank you for taking the call.
Yes, and Maersk talked about the 2020 low sulfur regulations being a $10 billion cost for the industry, can you just talk about what routes or vessels this might affect more and can this all be passed on to customers?
Peter Curtis
Yes it’s Peter here. The 2020 is a global cap on sulfur, so it's not a particular route.
There are certain areas that already have a cap that's lower than that. The global cap is 0.5% and there are certain areas that already are at 0.1%.
So what Maersk is referring to is the move towards compliance fuels is it originates in the fact that the compliant fuels are more expensive than the current fuels. Just fundamentally the fuels we use today are really at the bottom of the refining process, one cut above what we put on the roads.
The compliant fuels are either from sweet crudes or they are blends with distillates and as you know distillates like marine gas oil or marine diesel is a higher value product than the heavy oil. So really they are talking about the spread between the valleys and of these fuels.
Alternatively of course there is the investment in scrubbers, but there's been so little uptake in scrubbers to-date. And Maersk's stated opinion is that they don't want to go for scrubbers, they feel it is the wrong direction for the industry, so it's certainly in the price differentials.
Unidentified Analyst
Okay and then one more on capital structure, what do you estimate your cost of capital to be and how do you think that compares to your peers?
Ryan Courson
Hi this is Ryan. From a cost of capital standpoint that's an internal calculation that we look at and I'm sure that from our public disclosure you can get a good sense of how you think about it as well, but that's not a metric that we use.
Unidentified Analyst
Okay, that’s fair. All right, thank you guys.
Operator
Thank you. And our next question comes from the line of Mike Gyure with Janney.
Your line is open. Please go ahead.
Michael Gyure
Yes, just real quick down the newbuilds, can you give us just an update, I think those are scheduled for the second quarter here and then if you have any commitments for any more after the four that are scheduled?
Peter Curtis
Yes, it’s Peter. Our newbuilds, which they are four left, will old deliver within this month, after that we have no order book.
Michael Gyure
Great, thanks very much.
Operator
Thank you and I'm showing no further questions at this time and I would like to turn the conference back over to the company for any closing remarks.
Bing Chen
So, thank you very much everyone for taking the call, joining the call, and have a good day. Thank you.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.
Everyone have a great day.