Aug 1, 2017
Executives
Gerry Wang - CEO and Co-Founder David Sokol - Chairman David Spivak - CFO Peter Curtis - EVP and COO
Analysts
Michael Webber - Wells Fargo Noah Parquette - J.P. Morgan Greg Lewis - Credit Suisse Fotis Giannakoulis - Morgan Stanley Amit Mehrotra - Deutsche Bank Mike Gyure - Janney Montgomery Scott
Operator
Welcome to the Seaspan Corporation Conference Call to discuss the financial results for the quarter ended June 30th, 2017. Hosting the call today is Gerry Wang, Chief Executive Officer and Co-Founder of Seaspan Corporation; David Sokol, Chairman of Seaspan Corporation; David Spivak, Chief Financial Officer; and Peter Curtis, Executive Vice President and Chief Operating Officer.
Mr. Wang, Mr.
Spivak, and Mr. Sokol will be making some introductory comments, and then we will open the call for questions.
I will now turn the call over to David Spivak.
David Spivak
Good morning, everyone, and thank you for joining us today. Before we begin, I would like to remind you that our discussion today contains forward-looking statements.
Actual results may differ materially from results projected by these forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the second quarter 2017 earnings release and the earnings webcast presentation slides available on our Web site 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 Gerry, who will discuss our second quarter results as well as some recent developments.
Gerry Wang
Thank you, David. Good morning to everybody.
Before reviewing Q2 results, I would like to take a moment to discuss my decision to retire as CEO. It's been my honor to have led Seaspan for [nearly] [ph] 20 years, and to have worked with such an exceptional team of professionals.
It has been a fun, challenging, and rewarding journey. It was a difficult decision for me, but after much consideration I decided that the timing is right for both my family and the company, as Seaspan's financial and operational position is strong, and the industry fundamentals are improving.
I'm extremely proud of Seaspan's accomplishments and its unsurpassed industry position, which could not have been achieved without our dedicated employees. I would like to thank them for making Seaspan the first choice among customers and the source of our success.
I have partnered with Dennis Washington, Kyle, and the Washington family since 1990, long time ago, and I would like to thank them for their unwavering support, in particular, during the 2008 financial crisis with the $180 million Series A preferred equity investment. I would also like to acknowledge our many investors and capital providers including banks for their ongoing partnership with our company.
Finally, I would like to thank my wife and family for all the support they have provided me. Seaspan is fortunate to have Mr.
David Sokol as the company's new chairman, and I look forward to working with him and the management team during this transition. Please now turn to slide three of the presentation.
During Q2, we continued to manage our business well, generating strong operational results and improving our financial position. We achieved solid operating performance in this quarter.
Vessel utilization for Q2 was over 98.2%, an improvement over the prior quarter and consistent with the prior year. As well we continue to see reduction in ship OpEx per ownership day due to our cost management focus.
Improved utilization and lower ship OpEx were two of the main factors leading to an increase in normalized EPS compared to the first quarter. We also increased our operating fleet with the delivery of the Yang Ming Wind, in May, which is currently on a 10-year charter with Yang Ming.
We also took steps to strengthen our financial flexibility. First, reduced our net debt by approximately $147 million in the second quarter, second we renewed our 364-day unsecured revolver facility for $120 million, which is currently undrawn.
Finally, the number of unencumbered assets in our fleet has increased to eight vessels. I will now turn the call over to David to discuss our quarterly financial results.
David, please.
David Spivak
Please turn to slide four, where I will provide a summary of our financial results. Revenue decreased in Q2 2017 by $19.7 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 short-term market, including three 10,000 TEU vessels that were previously chartered to Hanjin. These decreases were partially offset by the delivery of the YM Wind this quarter, a full-quarter impact of vessels delivered in 2016, and the addition of two leased in vessels in 2016.
We had 142 days of unscheduled off-hire in Q2 primarily due to 99 off-charter days for Panamax vessels, and the short period at the beginning of April for one 10,000 TEU vessel currently on charter to Hapag-Lloyd. Ship operating expenses were $44.8 million, a decrease of $4.4 million from the same quarter of the prior year.
This is despite a 5.6% increase in ownership days from Q2 2016. As a result second quarter ship operating per ownership day was approximately $5,580, a reduction of nearly 14% compared to the same quarter of the prior year.
General and administrative expense was $7.5 million, which is a decrease of over 17% from Q2 2016. This was primarily due to higher professional fees and other expenses in Q2 2016.
The non-cash stock compensation component of G&A increased from approximately $1.5 million in Q2 2016, to nearly $2 million in the second quarter of 2017. Operating lease expense was $28.2 million in Q2 2017, an increase of $7.5 million from the same quarter of the prior year.
The increase was due to the full-quarter impact of operating lease expense for four operating leases entered into during 2016, as well as an increased expense from the operating lease financing for the YM Wind, which was entered into in May. Normalized EPS diluted was $0.17 for the quarter compared to $0.30 in Q2, 2016.
The decline in normalized EPS was largely driven by lower re-chartering rates, which was partially offset by the benefits of lower ship operating cost and lower hedged interest cost. Adjusted EBITDA for the second quarter of 2017 was approximately $153.9 million, a $23.3 million decrease from the same quarter of the prior year; cash available for distribution for the first quarter 2017 was approximately $95 million, a $16.2 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 Q2 2017 including short term investments was approximately $306 million, total borrowings declined by approximately $138 million during the quarter, shareholders equity increased during the quarter primarily due to the issuance of 5.65 million shares under our ATM program which raised slightly over $33.9 million of gross proceeds.
I will now turn the call back over to Gerry.
Gerry Wang
Thanks, David. Please turn to slide five, where I would discuss the current industry supply dynamics.
As you can see on the first chart newbuild ordering 2016 was lowest level since 2009, and the year to-date newbuild ordering is only about 39,000 TEUs. The containership order book is about 13.1% of the global fleet which is lowest this ratio has been in over 20 years, this ratio has declined since peaking around 2008 and is expected to fall further as the order book continues to deliver and the newbuild ordering remains constrained.
As I have mentioned before, containership scrapping in 2016 was as highest level ever at over 650,000 TEUs or over 3% of the global fleet. Through June 30 of 2017, scrapping had reached nearly 293,000 TEUs or about 1.4% of the global fleet.
Scrapping was very high at the beginning of the year but had since declined due to the improving industry conditions. Importantly approximately three quarters of the scrapping that has taken place in 2017 has been for vessels of smaller than 5,100 TEU which is helping to restore balance in those asset classes.
We are encouraged by all of those steps. We believe the industry is moving towards overall balance and a long-term stability.
Please move to slide six, where I would discuss the demand side of the equation and how this is impacting freight rates and charter rates. We have seen a noticeable improvement in trade demand in 2017.
With the year-to-date demand growth in the 5% range and independent forecasts predicting 5% for 2018 as well. The idle fleet is kinds of at 2.6% of the global fleet, significantly lower than the same period in 2016 where the idle fleet was nearly 4.6%.
This indicates overall tighter market conditions reflecting the improving supply and demand environment. Freight rates have also been moving upwards.
The Shanghai freight rate index is nearly double the lows it reached in Q1, 2016. Turning to charter rates, we have seen some recent softening with the recent Panamax fixtures in the mid six today range however while these rates are off the peak levels of the beginning of Q2 they remain well above the low levels reached in 2016.
I will now pass the call back to David. Please, David.
David Spivak
Thank you, Gerry. Please turn to slide seven, where I will discuss some of the developments in our capital structure and balance sheet.
Overall we have been very focused on strengthening our balance sheet and reducing leverage and increasing flexibility. We have reduced net debt by over $650 million since December 2015.
We currently have eight unencumbered vessels and our goals to significantly increase are unencumbered asset pool through time. Our long term capital structure targets are to maintain a net debt to equity ratio below two times at a net debt to EBITDA ratio below five times.
Please turn to slide eight, where I will provide our forward guidance. We do not intend to update our quarterly guidance in the ordinary course of communications.
For Q3, 2017 we anticipate that revenue will be between $209 million and $213 million. Ship OpEx is expected to be within a range of $46 million to $49 million.
We expect our operating lease expense to range between $29 million to $31 million increasing due to the full quarter's impact of why and when financing in May, 2017. Depreciation amortization expected to range between $48 million and $50 million.
We expect G&A expense to range between $7 million to $8 million consistent with our current levels. The estimate excludes costs related to the one time share grant to our new Chairman.
Finally, interest expense at the hedge rate is expected to range between $38 million and $40 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 back over the Gerry.
Gerry Wang
Thanks, David. Please turn to slide nine, where I will make a few closing remarks.
We remain committed to taking steps to capitalize on our leadership position and take advantage of improving market fundaments. We'll continue to take measures to strengthen our balance sheet as we seek to grow our long-term contract backlog primarily through the potential acquisition of modern second-hand assets, and the sales leaseback opportunities.
We intend to be creative in pursuing potential partnering opportunities as well. We'll continue to provide best-in-class operations with effective cost management.
Finally, we'll continue to seek for the opportunities benefit from the anticipated recovery in the industry. Before taking the questions, I would like now to turn the call over to our Chairman, Mr.
David Sokol. David, please.
David Sokol
Thank you, Gerry, and David. Well, just quickly, since joining the Board, in April, I've been very impressed with Seaspan's dedicated and talented operations team and executive team.
And frankly it's an honor to serve as their chairman. On behalf of the Washington family and the entire Board of Seaspan we would sincerely like to thank Gerry for his invaluable contributions, and frankly unrelenting focus on making Seaspan the current and, going forward, industry leader.
Gerry will surely be missed, but we understand and respect his decision after nearly 20 years of leading Seaspan, and really appreciate all the work he is doing to transition through this process. And we look forward to working with Gerry; not only through this process, but what I'm certain will be a long-term continued relationship as we move well into the future.
I'd also like to congratulate Peter Curtis on his promotion to Executive Vice President. For 16 years, Peter has personified the Seaspan commitment to excellence and to exceed customer expectations, which will remain a hallmark of the company going forward.
I look forward to working with Peter and the entire team as we continue to meet the exacting needs of our customers, as well as the highest operational, safety, and environmental standards within the industry. Seaspan's long-term prospects we believe remains strong.
And we think Seaspan's leadership position and strong financial flexibility will provide us with an excellent foundation to capitalize on what could be compelling opportunities through this industry shift, and opportunities for all of our employees, customers, and shareholders. So with that, really glad to be here, and turn it back over to Dave Spivak.
David Spivak
Yes, operator, we're free for questions.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Michael Webber of Wells Fargo.
Your line is open.
Michael Webber
Hi, good morning guys. How are you?
Gerry Wang
Good morning, Michael.
Michael Webber
Congrats to Gerry, and to David. And then to Peter Curtis as well, I'm not sure if he's in the call, but I know he was promoted as well; [indiscernible] so best of luck to Gerry.
Gerry Wang
Thanks, Michael.
Michael Webber
No problem. I'm sure we can catch up later.
David Sokol, I just wanted to take the opportunity, now that you've been there for a little while. I'm just curious at this kind of inflection point for the company, now that you've had -- I think it's a couple of quarters under your belt, what do you see is the biggest challenges for Seaspan over the next, call it, three or four quarter, the next two years?
And what do you really want the set-up to accomplish over the next two years?
David Sokol
Well, I think the challenges for Seaspan aren't a lot different than the challenges of the entire industry, and that is going through a cyclical downturn, a supply-demand imbalance that is starting to rectify itself. So I think obviously focus on exceeding our customers' expectations, and really doing that through operational excellence.
I found in my prior industry experience in the power and energy industry that the best way to move through a cycle is to make sure your customers are happy with everything you're providing them. And that's something that Seaspan does extraordinarily well.
I think one of the things we'll prioritize through this period, because it often gets overlooked is, is providing our employees worldwide with the training, the resources, and the tools they need to move into the next frontier of efficiency and operational excellence. Because I think that's -- too many companies when they go through a period like this try to reduce those costs rather than emphasize the importance of taking care of your customers positively.
I think we're going to focus on accretive growth. Changes in an industry like this provide often times significant opportunity to accretively grow the business, add different skills to the company, and to continue to diversify risk.
And then I think the most important thing we're going to do long-term to be able to provide us the ability to do all that is to really focus on improving at constant across our entire capital situation and our credit quality. I think we just have to de-lever where possible.
And through accretive opportunities just continue to improve the credit quality. And if we do that and we satisfy customer expectations in a serious way I think we can come out this cycle in a very solid basis.
Michael Webber
Excellent, that's helpful. Around the chartering, I guess chartering risk.
And I guess maybe your forward mix of business, Gerry's relationships and fairway, if you will, are certainly pretty well known. And the mix of business for Seaspan has certainly been more focused around Asian lines as opposed to the European liner community.
Do you expect any material shift in your mix of business two, or three, or four years out, just as the dynamics of those relationships change? Yes, if any thoughts around that.
David Sokol
Well, no. I mean, I don't really anticipate any significant changes in that regard for two reasons.
One is, while there could be changes in that regard depending on what type of accretive activities we have going forward, those are impossible to predict with any certainty. So really couldn't make any expectations there.
And the other side is, Gerry's been absolutely clear and fantastic to work with through this process the last several months, frankly, that this is his child -- and one of his children. And he's going to be with us from the standpoint of maintaining relationships and transferring those relationships, et cetera.
So my experience in the past has been, if you take care of customers the way they expect. Exceed their expectations whenever possible, and help them through difficult times they tend to be loyal back.
And we're certainly going to be loyal to the customer base that we have, and doing what we can to find additional ways to serve them.
Michael Webber
That's helpful. One more of me and I'll turn it over, for David Spivak.
So the $6.3 million non-cash termination charge, I believe it's on slide 13. I think that's related to the termination of the agreement with Graham.
But I'm just curious, is that new comp associated with the termination or is that just the expedited investing of existing equity?
David Spivak
There was a termination payment when we terminated the agreement. So, it was paid in stock, so approximately 950,000 shares, but it equated to $6.25 million…
Michael Webber
Okay, that's helpful. I'll turn it over, and get back into queue.
Thanks guys.
Gerry Wang
Thanks Mike.
Operator
Thank you. Our next question comes from the line of Noah Parquette of J.P.
Morgan. Your line is open.
Noah Parquette
Thanks. Gerry, best of luck to you.
Congratulations.
Gerry Wang
Thank you.
Noah Parquette
I just have the question on for David. You talked about the leverage targets on slide seven.
I guess, one -- I had two questions on this. Would you consider your leverage ideal right now because it seems like you're well below your debt-to-equity target?
And then second, how you kind of factor in or think about in your off balance sheet on operating lease add into this?
David Spivak
I think the net debt to equity is below the target currently. It's slightly below 1.6 times.
I think the net debt to EBITDA; I think when we think about EBITDA we kind of have to think about through time. So we would exclude some of the gains on some of those operating lease transactions.
And there, I think we're still looking to bring down leverage. Now, some of that will come through time just with cash flow generation.
We obviously reduced the dividend. The Washington family is in the DRIP.
And also, the industry is healing. And so we expect charter rates to move up in our short-term portfolio.
So, from our perspective there's still a little bit work to do. I mean, we did raise a lot of capital last year, about $660 million of equity, a little bit this year.
And so I think we're largely through it. But we want to be on our front foot.
And our customers, when they look at us, they want to see financial strength. There's a lot of opportunities in this sector.
They're not going to go away overnight. And so we've been very focused on positioning ourselves to pursue opportunities.
And also tap different markets. And I think last call we had talked about raising unsecured debt capital, and looking to unencumber a lot of our assets.
And that still is a priority and something that we're evaluating.
Noah Parquette
How do you view the unencumbered assets? And that's just potential flexibility down the line?
What's kind of the strategy behind that?
David Spivak
It's really about flexibility. I mean, if you look at other industries whether it's real estate in the REITs, if you look at what the aircraft lessors have done, they went from almost entirely secured capital structures to a mix of secured and unsecured.
So I think some of it is diversification of funding, but some of it is flexibility. I mean, the reality is when you go through tough times having unencumbered assets gives you more flexibility, whether it's raising secured financing at those times, or other avenues.
And I think just given the scale of our balance sheet today, at over $5 billion, and where we'd like to go through time, it's really kind of the maturation of the capital structure.
Noah Parquette
Okay. And then I just had a follow-up on the vessel operating expense, and the cuts have been really impressive.
I guess just get a sense, is there more there or is this a function of some of the newer ships? I know you guys have been focused on cost-cutting, but is there more room here?
David Spivak
I'm going to give the question to Peter Curtis.
Peter Curtis
Hi, yes. Good question, thanks.
It's Peter Curtis speaking. We're into three years of significant efforts to mitigate our cost structure.
And we've been very successful in seeking efficiencies throughout the OpEx bandwidth. And generally speaking, we believe most of the initiatives are sustainable.
Due to the nature of the cross management aspects like bulk purchasing from time to time make the extrapolation from quarter-to-quarter a little bit difficult. Economies of scale for sure have been beneficial.
Our mature operating platform has allowed us to find and exploit opportunities. Our financial strength along with mature connections with suppliers and service providers, large and small, have derived substantial commercial benefits and savings.
We intend to continue focusing on the focus of managing costs, and we believe these are sustainable, as I've said. But we think there's less and less blood in the stone going forward.
Noah Parquette
Okay, thanks.
Operator
Thank you. Our next question comes from the line of Greg Lewis of Credit Suisse.
Your line is open.
Greg Lewis
Yes, thank you and good morning gentlemen. Gerry, congratulations, it's definitely been a privilege learning from you -- for probably about a decade.
You'll definitely be missed. Good luck, and yes, all the best.
Gerry Wang
Thanks, Greg.
Greg Lewis
Just from a big-picture standpoint, there's been a tremendous amount of consolidation among your customers. This is, I feel, like the first time in a handful of years that the liner companies are actually generating some solid returns.
How does that or how should we think about that impacting Seaspan over the next one to two years? And David, does that make your job or your ability to go out and get unsecured financing all the more better as customer seem to have really put themselves in a much better financial position maybe than they were over the last two to three years?
David Sokol
So there's two questions there. Maybe I'll take the latter one, and Gerry can talk about more broadly just changes in the customer side.
But clearly people have been focused on counterparty risk given what happened with Hanjin, and seeing a profitable liner sector and stronger fundaments, improving industry discipline, those are all good mix. And so, whether it's equity investors, debt investors, lenders, all of that is a good thing, and we feel good about our customer base.
So, clearly, that has been a positive, and it's good to see that our customers are either profitable today or about to become profitable. And Gerry, I don't know if you have some comments?
Gerry Wang
Yes, I have a couple of comments. Greg, it's been a pleasure working with you and others in the call.
And Greg, I've enjoyed connecting with you guys, with the investor community, and I'm very pleased with everything you guys have done for me. And I just want to take this opportunity to thank you for speaking to me, and communicating with me from time to time, literally every quarter.
Concerning the consolidation, the two points I want to make is, firstly, our customers, the liner operators, their business is really to move boxes from point A to point B, which is more like logistical supply chain. Ocean shipping is only one segment of the overall supply chain.
They have to deal with land transportation, warehousing, terminals, container boxes, the load and discharging, railways, and all those things -- highways. And for them to put too much capital into ships, which is only segment of the overall chain there probably is not the best allocation of capital for their capital efficiency.
I see this trend to continue. I don't think the -- outsourcing trend will change that much.
And so as independent owners we're the leader, and I'm sure we'll benefit from the modernization of the fleet. And also, as David Spivak said, the opportunities in sales leasebacks and things like that we've been talking to you about potential partners and the customers in constant basis.
We evaluate and decide which project to take, and then we'll go from there. So we actually are quite busy in that regard.
The second point I want to make is -- you heard from Peter Curtis, our Executive Vice President and Chief Operating Officer, he's been really heavily involved in building an infrastructure. Greg, one thing I just want to highlight.
Seaspan is not just a financial leasing company. We're a company with all the tools necessary to operates the ships demands for ships from ships design, to crewing, the training.
We have over 500 cadets. That those things enable us to provide the services and the operations that would exceed the requirements of our customers.
So in that regard I just want you to take notice of that. And things that we've done are really beyond what the expectations.
As our Chairman said, during downtime if we can help the customers and work with the customers improving the efficiency and they will remember you. And loyalty is often built through the tough times working together.
And our philosophical approach of customers, customers, customers, has really set us apart from others. So we believe our expertise and our DNA in working with our customers exceeding expectations will continue to help us.
And we believe our future will be very good as a result of this consolidation which makes our customers better, and a stronger balance sheet, improving the overall industry dynamic. So we're excited about the opportunity.
And as our Chairman said, we're there to grow; we're there to continue to make ourselves stronger, improving our balance sheet, improving our credit quality. And our intention, with me or without me, is really to act as a consolidator in this space.
And I wish them good luck, and I'll do the best I can to work with them. And I'm excited to see the company under the leadership of Mr.
Sokol, continuing in the same direction as I've set. And good luck to them, and I'm very happy with the situation we're in now.
Greg Lewis
Okay, gentlemen. Well, thank you very much for that Gerry, David, and David.
Yes, looking forward to working with you. And have a great day.
Gerry Wang
Thank you, Greg.
David Sokol
Thanks, Greg.
Operator
Thank you. Our next question comes from the line of Fotis Giannakoulis of Morgan Stanley.
Your line is open.
Fotis Giannakoulis
Yes, hi gentlemen, and Gerry, all the best to your new path, and congratulations to David and Peter for their new roles. David, I want to ask about the search for the new CEO, if you can provide us with a broad description of the profile of the CEO that you're looking for.
Is the focus more on the financing side, given the long-term nature of the contracts of the company and the importance of the financing, or more on the commercial activities? And can you give us a little bit background of the negotiations over the last four months, if there is any change in the strategy of the company overall.
Thank you.
David Sokol
Sure. Maybe if you could -- and what do you mean by the negotiations in the last couple of months, just so I make sure I know the question.
Fotis Giannakoulis
Yes, I mean that there was some negotiation about the employment contract of Gerry, and the potential of staying as a CEO or departing, what led to this decision? And if there is any change in the strategy of the company.
David Sokol
Okay, yes -- no, I appreciate it. Yes, well let me take the latter first, and that is that we did have negotiations with Gerry, as was announced in April.
Gerry understood that and cooperated with the fact that we wanted to work towards moving away from transaction fees, et cetera, and potential conflicts of interest of the team. And so our first step was taken there in April, and then we agreed to negotiate to come up with a new employment agreement with Gerry.
That's gone extremely well. And now, unfortunately, Gerry made the decision through this process, but not shockingly.
Gerry's been running this company for 20 years, and in the process of thinking about that future commitment Gerry informed us that it's been 20 years and being CEO is a 24/7 job, and that he felt it was time to take a break, and would cooperate in any way with us going forward. But there wasn't a breakdown of negotiations in the sense that -- we wanted Gerry to stay, and had proffered an arrangement to try and convince him to stay.
But 20 years is a long time to be a -- well, I guess, more like 12 or 13 years as a public CEO, but 20 years as CEO. And many of those years was starting a business up, which is even more difficult.
So our goal going forward is not to change any fundamentals as far focus or priorities of the company, but to, as I'd mentioned, focus on customer satisfaction, giving our employees the tools, and skills, and support necessary to manage an extraordinary fleet of ships like this company has, and the relationships with regulators and customers, but also to look to continue to grow the business. So the CEO search -- and Gerry's agreed to cooperate with me in helping trying to find this individual.
I would start out by saying that the CEO we're going to be looking for is one who could take us to the next 20 years of growth. And so we'll be looking for someone with strong commercial skills and strong vision, hopefully good knowledge of this sector or a sector that has similarities.
But one of the benefits that this CEO will have is that he's got, frankly, I think an extraordinary operating platform. Gerry mentioned it earlier.
I would emphasize the fact that Seaspan is often looked at as a leasing company; it's more of an operating company than a leasing company. And the operating platform that they have is, in my view having run operations platforms in several industries, as good as I've seen.
And some of the recognition of that is the cost reduction per day that you've seen coming through from Peter's group are extraordinary for particularly it was already an industry leader. But doing them on a sustainable basis, not making silly cuts, but making cuts that are made by implementing technology, implementing efficiency measures, really starting at a bottoms-up look at your budgets and how you spend money, et cetera.
So the operational platform and the ability to manage this fleet is very solid. While I would certainly want to an incoming CEO to have a solid background in finance and understanding of finance and accounting, there too we've got a very, very solid accounting and finance group headed up by David Spivak.
And so we can really focus on brining in a CEO that has long-term vision and leadership skills, commercial skills. But obviously we want him to have a balanced background.
It's, on one hand, going to make it hard because Gerry has been an extraordinary CEO and leader in this business, and that's always hard to replace. But one of the strengths of a good leader, and Gerry personifies this, is he's leaving a very strong team behind him.
So I'd make one other point is myself and the Board recognize that we're not going to be in a huge hurry to find that CEO. We want to find the right CEO for the next 20 years.
And so I've committed to stay as involved as necessary for up to three years. Now, I certainly don't expect it to take that timeframe, but given Gerry's continued involvement, the Board's focus, The Washington Companies' family focus, and the employee group and platforms we have, I think that we're in the fortunate scenario where we can go find the right person, and not have to be in a rush to do it.
Fotis Giannakoulis
Thank you, David, for this very complete answer. On the commercial said, I want to ask if there is any visibility or any discussions regarding the employment of the open new buildings.
And David, if you can also comment about the financing of these vessels, even without a contract I assume that you should be able to get pretty good financing based on the asset values of this vessel. Can you give us some guidance on what happens with these two new buildings?
And also if you can remind us what is the debt of the three Hanjin vessels right now.
David Spivak
Sure. Why don't we start off, Gerry, just on commercial employment.
Gerry Wang
Yes, on the -- we have two new building vessels which were deferred from '17, it was due, Q1- Q2, 2018. We have terrific relationships with the builder, YZJ, so we have some flexibility as to the exact delivery date we want, and we appreciate that.
We thank YZJ for giving us these flexibilities. That's very important in today's market.
The second one I want to make is we are in fairly advanced negotiations for the employment contract for those two vessels. The charter duration is medium term, and quite decent.
We were quite happy to continue to do the work, and conclude the contract in the near future. Once the negotiations finish, the deal is signed, then we'll make it public to the market.
And at this point in time we're working hard on it. The other thing I want to say is we have also started discussions with export credit financing group from China to consider us part of the export credit regime.
And we have tremendous relationships in Asia, in China, in Korea, in Japan. We enjoy probably one of the best credit names for the export credit agencies.
And we're going to take advantage our name recognition and the relationships with the export agencies. As you know, during bad times export agency are providing the best credit in the financing.
And we're one of them to receive the support from them. So, hopefully we'll conclude the charter soon, and hopefully we'll also secure the financing soon as well.
So we're quite happy with the progress that we've made for those two vessels. And as for the three Hanjin chartered vessels, they're under employment contract.
We are very happy with the performance of those vessels. The customers have also expressed tremendous satisfaction with the performance of those vessels.
Right now we think the employment will continue until probably towards the end of '18 or early '19, and the basic market conditions have improved, and we're well positioned with our expertise and the quality of vessels, and we will continue to work hard. David, please.
David Spivak
Yes. So just on those three vessels, they're in two different facilities.
So, when Hanjin went bankrupt and we took the vessels back, on one of the facilities what we did is we got a waiver till the end of December 2018 as far as finding a suitable replacement charter, because both of the facilities required that we find a replacement charter that the lenders team suitable. So we have a waiver on financially against one of those vessels till 2018.
And the balance under that facility is roughly maybe $70 million. The balance on the other facility which is secured by two vessels is about $115 million.
It actually shows up in current liabilities. In that one, we have a waiver till middle of October.
We are in discussions, constructive discussions about extending the waiver. In addition, we have received several financing proposals if we wanted to refinance those vessels at actually quite attractive terms, lower margins than what our existing margin is.
So we're working through that process, but we feel comfortable with it.
Fotis Giannakoulis
Thank you very much, David. Thank you, Gerry, and best of luck to your new life.
Thank you.
Gerry Wang
Thanks a lot.
Operator
Thank you. Our next question comes from the line of Chris Wetherbee of Citigroup.
Your line is open.
Unidentified Analyst
Hi, good morning, this is [indiscernible] on for Chris, and I wanted to congratulate both David and Peter, and Gerry as well and wish you the best of luck.
Gerry Wang
Thank you.
Unidentified Analyst
Gerry, one of the questions I had to drill down on a little bit, you talked about long-term management of the balance sheet leverage targets, some of the shorter term financing, so sort of overall maybe big picture, wanted to get a sense of the requirements and your capital needs, how do you think of the prioritization of the capital needs maybe over the next six, 12 to 18 months? And then in that context, how are you thinking about the ATM program and as a case of using utilizing that as a source of funding?
Gerry Wang
Sure. Look as far as maturities, we don't have -- other than sort of regular amortization, there aren't a lot of maturities until 2019, and we are focused on sort of those maturities today.
It's important to be focused sort of well in advance. We went through a huge build-up program over the years, the leverage had ticked up, I think over the last 15 months we've focused to kind of resize that leverage and sort of bring it down, particularly given that -- you know, it's been a challenging sort of industry environment.
Given the magnitude of opportunities, for us, I think the importance is to be able to sort of access different markets, and in scale. And the key to doing that is to have very strong credit quality.
And so we have improved most of our leverage metrics over the last little while. There are still some improvement to do ,but some of that is just going to come from improving health of the industry and watching the EBITDA respond to that as well as some de-leveraging, and that should sort of put us in a good place.
And we are looking at lot of different markets. As far as the ATM, we put in place a $75 million program.
We've done a little over $58.5 million. So there really isn't a lot left.
We have noted that, that program has been a bit of an overhang at times in the stock at least you know, we've had feedback to that effect, but at this stage, there isn't a lot left to it. And we raised a fair bit of underwriting in Q2, but at this stage, there is not a lot of capacity.
Unidentified Analyst
Okay. Thank you very much for that.
And just one quick follow-up on the operating expense side, there is not a lot of blood left in the stone and you guys are doing a great job on managing the operating expense side. It seems like if I can get a sense of what's left, is it the remaining, you know, what are incremental that may be savings on operating expenses is that more from economies of scale and efficiency or there may be more secular, specific items that you would want to target going forward that could add little bit incremental?
David Spivak
Thanks. Our focus has been right across the whole of the OpEx spectrum.
We had a look at all of the categories. We continue to utilize our economy scale.
That has proven to be quite substantial especially with the growth of the fleet over the past two years, And Now that we've come to the end of the, the current build schedule, we can focus a lot of attention on more of the -- should we say, the more difficult fruit. I think we've achieved pretty good things to-date.
I don't expect in following years that we have achieved similar numbers. As I said a little earlier, I believe that we are -- what we've achieved has been sustainable.
Don't forget, you know, what Gerry said about us having a complete operating structure which runs through crewing, technical, operational, designing of the vessels et cetera. We do have the benefit of harmonization or linking these things together to try and help us improve efficiencies.
So, yes, it's the same sort of numbers as last year, and this year going forward I think would be quite difficult.
Unidentified Analyst
Okay, that's very helpful. Thanks very much for the time, gentlemen.
I'll turn it over.
Gerry Wang
Thank you.
Operator
Thank you. [Operator Instructions] The next question is from the line of Amit Mehrotra of Deutsche Bank.
Your line is open.
Amit Mehrotra
Hi, thanks. Good morning everybody.
Gerry, congrats, best wishes for the next chapter.
Gerry Wang
Thank you.
Amit Mehrotra
David Spivak; David, you know you're a capital structure guy, you have deep knowledge of various forms of financing obviously, so I guess in that context, the first question I have is, is that when that when the new leadership and the new CEO arrives at least, I am wondering you know what will you advice in terms of changes in how Seaspan will manage its own capital structure, whether that's related to obligations on an off balance sheet or LTV's or anything else? Is there anything that maybe you would do differently given the weakness we've seen in rates in asset values, or will be kind of more the same with respect to how the company utilizes its balance sheet to ultimately maximize returns on equity?
Thank you.
David Spivak
Sure. One thing I will say is sort of him stepping in I inherited a lot of different opportunities that the company had already been looking at.
And there's been tremendous creativity over the years and I will say a lot of that actually stems from Graham Porter. Graham was fantastic at identifying different pockets of capital, and the operating leases that we have done we are the only container ship leasing company that has access to those markets, and that really is a credit to Graham and Gerry.
And like any of those pockets though there's kind of a natural level of doubt and natural percentage that you'd want in the overall financing platform. And it obviously has a level of complexity.
And so, what we have done a number of those, and we may still do some. I think we've kind of hit the level where that bucket sort of makes make sense.
Where I focus a lot of my time has been really on the bringing leverage down over the last 15 months, and we have done that. We did get a little lucky.
Given everything that sort of happened with Hanjin and the noise around the sector things were a little tricky last year. But we were able to sort of raise a fair bit of capital bring down leverage.
The reason why we have eight encumbered assets today, which still is a small amount is because we had brought leverage down. And those assets, a couple of them have five-and-a-half year charters at 34,000 a day.
So, it's not just the assets, it's the cash flows. There's real value economics in that unencumbered pool.
Where we're at today because we have brought down leverage, it opens up another level of opportunity which is probably the next stage is looking at a variety of unsecured debt markets, and we really have them looking at several. And the Board is involved in evaluating them, and David Sokol has actually provided a lot of insight based on his experiences into different markets.
And so, for us that is kind of the next stage. And to give you an example, we have approximately $220 million of debt that secured different facilities, you know, matures a little bit in 2018 primarily 2019, secured by 27 vessels.
And so, refinancing those will take an unencumbered asset pool from eight to 35. And when we kind of look at that and we look at some of the lessons learned by the aircraft where source coming out of the financial crisis, what they have done and achieved, you know, that's some of what we are looking to do.
Our industry is different, we will always use secured capital, secured capital is every inexpensive. We deal with 45 banks globally.
We see you know, great terms and we've seen great terms throughout all the turmoil in the sector. But the reality is part of getting great terms is turning them down, because we have other sources of capital.
There is nothing that we like more than to tell our banks, "Thank you, we want you there when we need you." But we don't -- and so that's what we are really wanting to do, and read specifically at 5 billion asset base, we are still relatively small.
We want the capacity to really grow. And I think to grow we need to kind of build upon, you know, the platform that Gerry and Graham and others have built and take it to the next level.
And there is a lot of knowledge on the Board and throughout the company, and looking to do that.
Amit Mehrotra
Yes, okay. Well, thanks for the answer.
Just a follow-up on that in terms of the leverage; can you talk about net debt to equity, but when you deal with your 45 banks, I mean they are not really looking at net debt to book equity, at least correct me if I'm wrong, they are really looking at sort of net debt to market value, the assets, and so that really becomes the more relevant leverage metric to manage to. And I was hoping that if you could help us a little bit think about how the company's financial position looks relative to where the market value of the assets are on, and off balance sheet obligation, so if you can just give us - I mean I obviously have a sense but you know, my estimate can be wrong based on the cash flows associated with some of those assets, can you just help us where you think that is?
David Spivak
I guess the first thing about us is other than maybe two or three exceptions. Our financial covenants on our bank facilities have always been based, one, on a non-consolidated basis, and two, they are based on accounting figures.
There are obviously some sort of modifications and the loan agreements to them, but -- so those are the things that sort of drive sort of a lot of the discussions with banks. You are correct though that in raising sort of new financing or refinancing, you know, banks look vessel values, and they also look at charters.
And having long-term charters has been a key for the company. What I expect that will happen with us through time is that a lot of our short-term portfolio will become unencumbered and that gives us sort of flexibility.
We could look to re-lever those assets in secured market, and we may. But it's a natural place, partially because those are the facilities that are maturing over the next few years.
Those are the facilities that were put in place for several years ago. But if we look at kind of financing today in new opportunities, a lot of the secondhand opportunities we are looking at, they will come with charters.
And so, there is kind of the asset value, there is the cash flows from the charters, and the banks were looking at that, and the advance rates are different. What I would say is that we have done just on balance sheet secured bank financing, capital leased financing, we've done operating leases.
In that operating lease markets, there is another dimension to it, the investors get certain types of tax benefits. So there are a lot of different drivers to this.
What I would say is that we brought down our secured bank debt on our balance sheet by over $700 million. And so with that, it has put us in a situation where there is more flexibility in refinancing in some of the work maturities.
Amit Mehrotra
David, one housekeeping, well, I've asked this before on the lease changes and lease accounting, do you guys know how the operating lease expense is going to be treated now, or any thoughts there, just an update? And that's all from me.
Thanks.
David Spivak
Fair enough. I have a feeling that we talked about this question little a year ago, but we are getting closer to the date.
So, what the new standard will do is we will capitalize our operating leases on our balance sheet. So it is going to grow separate balance sheet, just kind of the present value of the [indiscernible] we will have an asset, the corresponding asset, and so that standard will change our balance sheet presentation.
As far as our income statement's presentation, even though -- there is going to be a liability on the books, there still will be an operating expense line item. So it's kind of a mixed model.
It seems like the accounting profession was more focused on the balance sheet and changing the income statement presentation. So that will largely stay the same.
We do have a lot of deferred games on our books of couple of hundred million dollars, and we do amortize that into income. And that is a reduction of operating lease expense today.
Our understanding is that, that amount which is in other long-term liabilities will move into our shareholder's equity box and almost be kind of accelerated into equity. And so that will no longer be amortized through the operating lease expense line it will just go right to equity.
So that's our current understanding.
Amit Mehrotra
Interesting, thanks so much, appreciate it. Gerry, best of luck to you; thanks everybody.
David Spivak
Thank you.
Operator
Thank you. And our next question comes from the line of Mike Gyure of Janney.
Your line is open.
Mike Gyure
Yes. Thanks for taking my question here.
Really quick, on the -- I guess the future funding related to vessels that you contracted to purchase, can you give us an update on kind of what that number? I want to say it was about 470 at the end of the first quarter.
Can you let us know where we are at today?
David Spivak
Yes. So we have taken delivery of the YM Wind and then we did a sale leaseback transaction on that.
So that was about $80 million final installment. So there is about 390 million of CapEx, there is five vessels to MSE, which are on 17-year bareboat charter.
And then the two uncharted 10,000s that Gerry talked about earlier, where we are you know, looking at a deal, you know, relatively far along, including the financing discussions. And so, we -- this is at this stage largely funded.
Mike Gyure
Great, thanks very much.
Gerry Wang
Thank you.
Operator
Thank you. And at this time, I'm showing no further questions.
I would like to turn the call back over to Gerry Wang for any closing remarks.
Gerry Wang
Okay, thank you. I just wanted to say two things.
First thing, moving forward, I'm going to take a break as our Chairman has said. Obviously, I'm very sentimental.
It's my third [indiscernible] and you know, I've devoted all my time, my most precious life to this franchise to you know, building out together with Peter and others, and the help of Washington family. The decision was made on the basis of really I would need to have a break to go through in a professional terms [indiscernible] i.e.
looking at my body and then move forward, and I had extensive communication whatsoever with Dennis Washington, who is really my mentor, and he actually said one thing that really inspired me. He said, "Gerry, take care of your good -- your body, because we only have one."
I appreciate -- he is a [indiscernible] and -- so it's really by own decision. I love the company.
I have enjoyed working with Chairman David Sokol, but again it is an extremely difficult decision to make, and I will be here to support the company with a whole heart. And I believe the franchise is well-positioned in terms of our organization, the depth of our bench, and name recognitions, the marketplace, and accredited recognition in the marketplace as well, as David Spivak talked about various ways of the financing, and all of those things.
The one thing I may add to that is really -- it was first time in the history a America published the company to reach out to Asian community for the preferred [indiscernible] we will raise $80 million, put our name there, I think that area probably is a potential growth area for us, for capital, because shipping is more sort of a household name, and most of our customers are over there. I'm sure our team lead by David Spivak will continue to explore that.
I think Seaspan is a great franchise, and I'm very pleased with what we have achieved. So that's first point.
And the second point is I really want to say the market condition is really improving with the lined measures taking care of the vessels through the consolidation. I think on our part as the outsourcing tons of supplies, you know, we are seeing some consolidation as well.
I think the consolidation on our side and consolidation on our customer side will bode very well for both of us. Our customers want quality services and without minimum economic return, the quality services won't be sustainable.
It's just the way it is. And I think we will continue to work very hard and very diligently to maintain our service level, exceeding their requirements, making ourselves as the preferred choice, as Peter has really build up our reputation for that, but I think market conditions are really moving in our favor.
Again, the summer time, I want to thank all of you for supporting me for all those years, and good luck to you as well, and thank you very much for the call, and have a good time.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program.
You may now disconnect. Everybody have a great day.
David Spivak
Thank you…