Oct 31, 2018
Executives
Bing Chen - President and CEO Peter Curtis - EVP and Chief Commercial and Technical Officer Ryan Courson - CFO David Sokol - Chairman
Analysts
Melvin Shieh - Bank of America Merrill Lynch Michael Webber - Wells Fargo Securities Kevin Sterling - Seaport Global Securities Ben Nolan - Stifel Nicolaus Chris Wetherbee - Citi Chris Robertson - Jefferies Mike Gyure - Janney Montgomery Scott Mike Yarris - Morgan Stanley
Operator
Welcome to the Seaspan Corporation Conference Call to discuss the financial results for the quarter ended September 30, 2018. I would like to remind everyone that this conference is being recorded today, October 31, 2018 at 08:30 Eastern Time and will be available for replay starting today, at 11:30 Eastern Time.
Hosting the call today is Bing Chen, President and Chief Executive Officer; Peter Curtis, Executive Vice President and Chief Commercial and Technical Officer: Ryan Courson, Chief Financial Officer; and David Sokol, Chairman of the Board. We will open the call for questions after the presentation from management.
I will now turn the call over to Ryan Courson.
Ryan Courson
Good morning, everyone, and thank you for joining us today to discuss Seaspan's third quarter earnings. Yesterday, after the market closed, we issued a press release announcing Seaspan's third quarter results for the period ended September 30, 2018.
The release as well as the accompanying presentation for this conference call are available on the Investor Relations sections of our Web site. I would like to remind you that our discussion today contains 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, which are discussed in the Risk Factor section of our Annual Report filed with the SEC on Form 20-F for the year December 31, 2017. 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. As I mentioned last quarter, this is the first quarter we are not providing our historically-disclosed non-GAAP financial measures.
In the future, we may disclose certain non-GAAP measures, but only if we believe they provide investors with a more helpful and complete understanding of our results, while being consistent with how we view our financial results internally. Going forward [ph], we will increasingly focus on cash flow from operations as a key metric for our performance.
With that, I will now pass the call over to Bing to discuss the highlights for the quarter.
Bing Chen
Thank you, Ryan, and good morning everyone. Please turn to slide three and I will discuss highlights for the third quarter.
In summary, we are executing on our strategy, and I'm pleased with our performance. Our record operating results exceeded the guidance we provided, in August.
And I'm proud of our team for growing and strengthening our franchise while exceeding our forecasted results. The acquisition and seamless integration of GCI has been successful, and has contributed significantly to our third quarter growth.
Operational and financial performance, as we have grown year-over-year, from 90 vessels to 112 vessels, our third quarter utilization of 98.4% was a strong improvement from last year's third quarter performance of 96.9%. Revenue came in at the top end of our guidance range at approximately $295 million.
This represents a 40% growth in revenue year-over-year. The increase over prior year is driven primarily by the acquisition of vessels from GCI, improved utilization rates, and higher average charter rates for the vessels that were on short-term charters.
Our cash flow from operations was $142 million for this quarter, which is a 50% increase from the same quarter last year. EPS per diluted share was $0.36, which represents a 38% increase year-over-year.
Financing developments, during the third quarter we improved our cost of capital and increased financial flexibility through the redemption of our 10.5% Series F Preferred and issuance of $150 million Series I Fixed-to-Float Preferred Share, in addition to close to closing of our $150 million two-year revolving credit facility. We also repaid $225 million of secured debt, part of which were unencumbered six additional vessels, brining our total number of unencumbered vessels to 18.
Acquisitions; last quarter we highlighted that one aspect of our strategy is actively pursuing accretive growth opportunities. And we emphasized on our three primary criteria, risk-adjusted return, business rationale, and impact on balance sheet.
In early October, Seaspan announced it had entered into a binding term sheet for an investment of up to $200 million in the restructured Swiber Holdings Limited. The investment is expected to be funded in two tranches; the first tranche is $20 million which is funded upon closing in exchange for an 80% economic interest in the restructured Swiber Group.
The second tranche is a contingent incremental investment of $180 million in exchange for an economic interest in a potential $1 billion LNG-to-power project in Vietnam which is currently under development. We have worked diligently to structure this investment to ensure that while we protect Seaspan's downside risk, the acquisition provides substantial upside potential on incremental investment in a contingent structure which is fully controlled by Seaspan.
Management team; I would also like to highlight that we have expanded our management team. We have an extremely dynamic and exciting leadership team in place on which we can build success, and effectively scale our organization to support its growth.
In late-July, Tina Lai joined as our Chief Human Resource Officer, and as announced on Monday, we are pleased to add to our team Torsten Holst Pedersen, our new Executive Vice President of Ship Management and, Ted Chang, our new General Council. Please turn to slide four.
We have highlighted our key priorities a number of times during this year. Throughout the presentation we will discuss some of our recent accomplishment as they relate to these objectives.
As I laid out our strategy at the beginning of this year, we are committed to focus on, one, operational excellence. Two, strengthening customer partnerships.
Three, enhancing our financial strength and stability. Four, pursuing accretive growth opportunities.
And five, capital allocation. These five pillars will create a strong reliable platform for our customers, long-term franchise value for our shareholders, and a sustainable future for our employees.
Please turn to slide five. Two aspects I would like to focus on, improvements in customer partnerships and safety.
We have significantly strengthened our customer partnerships over the last quarter. There are several new charters with new customers that I would like to highlight.
Over the past quarter, we have added two new multiyear charters with two customers under innovative structures. We have led our industry in developing innovative structures in cooperation with our customers, and in consideration of their needs.
Our partnership with our customers and our ability to be flexible and creative to meet their needs provides our customer with confidence to secure long-term supply commitments from owners such as Seaspan with quality and reliability of services. Our partners know that they are well supported by our integrated platform and scalable business model.
As an example, we have strengthened our partnership with our largest customer, COSCO, adding six new charters. And we are actively engaged with them on further potential projects.
In addition to this, we secured contracts with two new customers, Coheung and Arkas. And we hope to continue to build upon these newly formed partnerships.
We remain trusted advisors to our customers, and we are in constant dialogue regarding new charter projects, [indiscernible] discussions, and new building projects. One of our major accomplishment for which I am very proud of our team is our success with safety initiatives.
Since we began tracking lost time injuries in 2013, we have implemented various initiatives that have brought our LTIF to an all-time low. The health, safety, and wellness initiatives that have implemented recently have further improved the safety and reliability of our crew.
I will now pass it over Peter Curtis who will discuss the current industry outlook.
Peter Curtis
Thank you, Bing. Good morning.
Please turn to slide six. To start off, it's helpful to show that despite recent charter rate spot market softening, some of which were seasonality-related, we continue to see broad-based demand growth on both primary and secondary types [ph], which combined with the improving supply backdrop is expected to lead to continued support of charter rates over time.
Charter rate fundamentals have improved across asset classes over the past 18 months. What is important here is that the improvement, generally, steady and stable, and has been driven by a more balanced supply and demand picture.
This is in contract to the market spikes, such as in early 2015, caused by the U.S. West Coast dock workers' strike, and in early-to-mid 2017, caused by are reshuffling of the alliances when charter rates spiked within a few weeks.
Improved charter rates have generally translated to improved asset values, and [technical difficulty] active in 2018. Buyers have been more active within the segment between 2,100 TEU and 4,200 as those segments is under-ordered and demand has proven to be relatively stable for this size segment.
We believe these more balance supply and demand characteristics will be the driving forces for continued charter rate to support long-term, albeit, bumpier times, which is beneficial for Seaspan. Please turn to slide seven.
The demand for global seaborne trade is a positive macro force impacting our outlook for Seaspan and the container shipping market in general. The relationship between GDP growth, containerized transport volumes, and global seaborne container trade growth is expected to remain relatively robust during 2019, at approximately 5%.
As mentioned, we anticipate a continued improvement and balance between supply and demand, as both global capacity growth and throughput growth converge, creating a more stable environment container shipping industry. While main East-West trade lines enjoy marginal growth, the regional and North South trades year-on-year have been quite sturdy with expected growth of 5.5% and 7% respectively, noting these lease accounts were over half of the container moves globally on an aggregated basis.
In developing economies, investments are being made in ports and terminal infrastructure to enable larger vehicles to access these regions. Substantial investments including those from China such as in the Port of Piraeus and Greece as a strategic press within China's One Belt, One Road initiative have facilitated many of these port upgrades especially in Africa, Southeast Asia, and Southern Europe.
We expect these trade line growth rates to continue to support a positive growth in demand providing support to charter rates. Please turn to slide eight.
Turning to the supply side, there are three key indicators that the industry is more appropriately managing the supply of vessels. First is in the detail of the idle vessel fleet.
Approximately 70% of the current idle fleet is made up of vessels below 2000 TEU where demand has been weak as liners focus on larger vessels which offer a lower unit cost. Secondly, the increase in demand for vessels larger than 2000 TEU has allowed lessors to negotiate a varied range of charter durations and limit the optionality on the duration of contracts with liners.
As such, Seaspan has improved installation against the simultaneously vehicle re-deliveries into the market. Alliances amongst container liners have also proven to be effective and agile in terms of managing the supply of vessels which supports sustainable freight rate improvements over the longer term.
Thirdly, the order book-to-existing fleet ratio is amongst 20 year low. And the majority of vessels to be delivered into the market during the rest of 2018 and 2019 are in access of 10,000 TEU with over 30% being ultra large 18,000 TEU vessels which can only go on the Asia-Europe trades.
As such, our short-term fleet is well placed to avoid the direct large ship competition and being in the under built sector of 3000 to 9,500 TEU also well-placed for the needs of the regional trades and for the shoulder trades to the main East West sectors. We expect this ordering discipline to continue luckily due to recent trends in liner consolidation and the view that liners will focus more on improving their freight rates and on gaining market share by undercutting one another.
And finally, scrapping volumes remained well below 2016 highest indicating a reaction to the effects of supplier rationalization. Despite forecast projecting scrapping for the full year of 2018 to be in the region of 390,000 TEU, only approximately 44,000 TEU has been scrapped year-to-date 2018 due the market recovery.
These improvements in the industry's ability to manage supply are also expected to carry forward into the future driving charter rates support. We believe that Seaspan is well positioned to capitalize on the improving industry fundamentals and that these fundamentals will continue to provide support to charter rates in the future.
I would now like to pass the call over to Ryan to discuss our financial results and forward-looking guidance.
Ryan Courson
Thank you, Peter. Please turn to slide nine, where I'll provide a summary of our financial results for the third quarter.
Ownership in operating days increased 21% and 23% year-over-year. This increase was driven by our acquisition of GCI and several vessel deliveries during the quarter and higher utilization rates as well.
Our revenue of $295 million came in at the high end of our guidance primarily driven by the increased vessel utilization rates, charter rate recoveries and the acquisition of GCI discussed above. Our operating expenses of $55.4 million were below our proposed guidance of $59 million to $63 million.
This was due to several significant management initiatives that have led to improved operating efficiencies for the quarter. These improvements in operating expenses allow Seaspan to continue to provide operational excellence by maintaining best-in-class reliability and allowing for cost savings to be passed on to our customers.
D&A expenses of $8.1 million came in at the bottom end of our proposed guidance range. Net earnings in the third quarter of $80 million were up 65% year-over-year.
GAAP diluted EPS for the quarter of $0.36 compared to $0.26 in the same quarter in prior year and up $0.02 from $0.34 in quarter two. This improvement over last quarter is mainly drive by lower ship operating expenses.
Over the quarter, I will note that a change in unrealized fair market value of our derivative instruments contributed $40 million of net income or approximately [technical difficulty] per share. This $40 million number is disclosed on our cash flow statement.
Cash flow from operations for the quarter was $142 million compared to $95 million in the same quarter in the prior year. As I mentioned earlier in the call, we will increasingly focus on cash flow from operations [technical difficulty] is most comprehensive KPI for our business.
I want to highlight the cash flow from operations include dry dock expenses which are effectively our maintenance capital expenditures. Our balance sheet at the end of Q3 -- our cash balance at the end of Q3 including short-term investments was $393.5 million.
Total borrowings of $3.3 billion are down from the prior quarter's borrowings of $4.5 billion primarily due to a reduction of secured credit facilities. Could you please turn to slide 10?
I would like to highlight our strength in balance sheet. We have made significant improvements to our credit profile over the last quarter.
We have improved our liquidity position with several strategic financings including closing the first of two of FairFax's $250 million equity investment, $150 million two-year corporate revolving credit facility and $150 million of preferred series I shares. These financings have improved our liquidity from $269 million as of June 30, 2018 to $541 million at September 30, 2018.
Our enhanced liquidity position provides us with greater financial flexibility. This is significant in the context of our objectives to pursue growth initiatives.
Our credit profile has also improved significantly. The $250 million equity investment from FairFax in July improves our leverage levels.
And we have made great progress using our discretionary cash flows to reduce the number and balance of our secured credit facilities. In the quarter, we repaid $225 million of secured debt.
Part of which were unencumbered six additional vessels. Bring our total number of unencumbered vessels to 18.
As discussed previously, we also reduced our cost of capital with the redemption of our 10.5% coupon series F preferred shares. And our subsequent issuance of $150 million in 8% coupon series I preferred share.
This represents an annual savings of approximately $3 million. I am very pleased with the progress we have made over the past quarter.
And we are well positioned to contribute to building long-term value. That covers the current quarter.
Now please turn to Slide 11 where I will discuss guidance for the fourth quarter. Please note that the following amounts are based on current information and estimates are subject to change.
We do not intend to update our quarterly guidance in the ordinary course of communications. As a reminder, we are providing quarterly guidance today for the fourth quarter.
However, beginning in 2019, we will issue only annual guidance as we believe it is more consistent with our strategy to build long-term shareholder value. Over the fourth quarter, we anticipate revenue will be between $291 million and $295 million.
The increase versus the prior year -- to the prior quarter will be driven by a contribution to -- from the GCI acquisition as well as this will be the same driver that contributes to both ship operating expenses and D&A. Ship operating expense is expected to be within -- between $58 million and $62 million.
Operating lease expense is expected to be in the range of $32 million and $34 million. Depreciation and amortization is expected to be in the range between $63 million and $66 million.
G&A expense is expected to be in the range between $8 million and $10 million. That concludes my formal remarks.
And with that, I would like to turn the call over to our Chairman, Mr. David Sokol.
David Sokol
Thanks, Ryan. During the third quarter, the management team continued to execute on Seaspan's long-term strategy, and with a number of significant goals achieved in accordance with the key priorities that had been set for the year by the Board of Directors.
I'd like to mention a few. We further built out leadership team and now have completed our long-term leadership team with the addition of Torsten Pedersen and Ted Chang.
Torsten is Executive Vice President of Ship Management, and Ted is General Council. Both of these gentlemen bring great and valuable experience to the company, and we think really round out Bing's team overall quite nicely.
As Bing mentioned, the company reached a new milestone in safety over the last nine months. And I have found that in my career that's a very significant accomplishment for the company, and one that has to be constantly paid attention to, along with vessel utilization and the operational performance of each of the vessels.
If you're measuring in detail each of the activities that bring greater attention to safety utilization and operational performance you tend to continue to drive the company in the right direction. And we're very pleased with all three of the measurements thus far this year.
As Ryan discussed, we've improved the balance sheet and the financial flexibility this quarter, and this furthers our strategic goal of reducing leverage and enhancing the credit profile of the business over time. We also continue to build out our professional platform for proper capital allocation, which has begun to take shape in this past quarter and included a small but buildable investment in the restructuring of Swiber.
I guess I could summarize the Board's view. In the first nine months of this year, we're very proud of what Bing and his team have accomplished.
And we've very pleased with where they are today. But both we and they continue to be unsatisfied, in the sense that we have a lot of activities yet to complete, and we can get a lot better.
We really appreciate everyone's time and attention in regard to Seaspan. And please feel free to ask any questions you may have.
I'll turn the call back over to the operator at this time.
Operator
Thank you. [Operator Instructions] Our first question comes from Melvin Shieh of Bank of America Merrill Lynch.
Your line is now open.
Melvin Shieh
Hey, good morning, guys. A couple of questions here, so it looks like rates and utilization held up a lot better than we expected.
How much of the positive performance this quarter do you attribute to a pull forward of peak season in the U.S.? And to what degree do you expect this tailwind to be going forward if this was a factor?
Peter Curtis
Hi, good morning. It's Peter Curtis.
It's difficult to tell what would be the pull-forward in terms of the rhetoric that's been going around. But typically, we actually see a little bit of a soft season, and when we look at the trends year-on-year, as a matter of fact over multiyear, the trends have appeared to be fairly normal.
That said, the utilization, for instance, on the trans-pacific from a liner point of view has been very good. It's in the high 90 percentiles.
Europe-Asia trade is also in the 90s, but in the low 90 percentiles. I hope that helps answer your question.
Melvin Shieh
It does, thank you, and thank you, Peter, for the overview on the market earlier. And just thinking about some of the risks to that, what's your view on the signs of the economy rolling over in China and cyclical peak more broadly.
I know you're concerned about your spot exposure in this market.
Bing Chen
Hi, this is Bing. I will answer your question.
With regarding to the general spot market, first of all, as you know majority of Seaspan's fleet is on a long-term contract, so we have a very limited number of vessels that is on the spot market. In terms of China's economy as well as the trade war with [ph] -- between U.S.
and China on the tariffs, we see a limited impact or non-significant impact to our customers. First of all, I think let's look at bigger picture perspective that today the perception and the reality is actually quite different.
Meaning that the reality, the impact to our customer which are the liners which we see are limited because we still see our customer continue to sign up the new contracts in the six to 12-months terms. This is because if you're looking at the statistics, okay, between U.S.
and China, the bilateral trade, it's about only 7%. We're talking about the container trade here, is 7% of the global trade, which is roughly about 200 million TEU, okay.
In which the China and U.S. trade in 2018 is about 10 million TEU and U.S.
to China trade is about 4 million TEU. And out of this, as of today, with the $200 billion worth of goods that is subject to the 10% tariffs, we see the impact is about roughly around 5% of this global trade impact.
And if we continue to see even in worst cast scenario, by the end of this year, beginning of next year, assuming the full 25% tariff is supplied, it's going to be additional about 1.5% impact on the container side. That is roughly the guesswork.
So, once again, from a bigger picture, I think the impact is to be somewhere around maximum about 6% to 7% to container overall volume impact, and specifically, from Seaspan's perspective, as again because our contract is long-term majority, and we have limited exposure to the spot. At the same time, given our innovative solutions that we can provide and taking to consideration of the current market environment, the limitations from our customer and we will be able to provide those solutions to address, to provide the flexibility to their needs to allow them to secure the long-term contract from the supply, like ourselves.
So, from our perspective, as you can see in quarter three, the utilization actually it's quite high, much higher than what we had in last year. So the impact on our side is negligible.
Melvin Shieh
Great, thank you, Bing. And yes, understandably the tariff impact is smaller than the perception in the markets.
I guess my question is more along the lines of just the general economy slowing down, especially with the stimulus measures being put in place in China, if you think that's -- if you have a view on if that's enough to stabilize the economy or just a general outlook for economic growth and how that impacts Seaspan.
Bing Chen
Sure. That actually is a very good question, because from China's perspective today, people would see that potential impact due to this trade war that is kind of impact the China's export, but as you may know well, that actually two years ago, China has already started the initiative of One Belt, One Road.
With this One Belt, One Road, even for the last year they have made significant headways in developing the business activities outside of China by exporting its goods and services. And this year, actually they continue making headways, so that will be a major initiative for China's economy going forward is by exporting its good and services along the land and maritime -- and seaway to the countries along this One Belt, One Road countries.
And that is one of the areas I think it will provide a growth for China. At the same time, I think China today, still with the government; I think they have enough, I would say, domestic market.
Because China as a country today they have 1.3 billion people with an economy still today it's rather robust. And we see the negative side of potential impact from U.S.
China trade, as well as some concerns, for example on the debt that China through the GDP. I think to that perspective is if you're looking at a developing country, whether it's United States or other developing country, in the same period of time impoliticly [ph] you will see that the debt to GDP actually is all similar in that range.
However, I think that China today has one of advantages because the government has a lot of them both fiscal and also economic tools to allow it to be able to adjust its economy as it sees appropriate, whether domestically or internationally, as we said, through the One Belt, One Road to maintain the growth, and been able to, at the same time, address some of these issues which are common. And I think I believe that the Chinese government is in a better position to address these issues and maintain the growth.
Melvin Shieh
Great. And thank you, Bing, that was very helpful.
If I could just one more quick one, and it seems like ship operating cost per day declined pretty substantially relative to earlier this year and also historically. Was there any specific reason for that, any cost control initiatives or what explains this?
Ryan Courson
Yes, this is Ryan. If you look at it on a cost-per-day basis the primary reduction from a spend standpoint was improved maintenance planning from the operations team.
From across the organization we had a number of initiatives to look at cost and think about ways in which we can plan the organization in a more streamlined fashion. And then what I would say is this quarter's results is a function a number of those initiatives.
Melvin Shieh
Great, guys. Thank you.
Operator
Thank you. Our next question comes from Michael Webber of Wells Fargo Securities.
Your line is now open.
Michael Webber
Hey, good morning, guys. How are you?
Ryan Courson
Good morning, Mr. Webber.
Michael Webber
I wanted to start with the gas, the power investments, and kind of touch on actually demand and OpEx actually. Obviously the deal mid quarter kind of came as a surprise.
You guys had talked about kind of looking at adjacent industries and looking for returns, of bolt-on deals that would fit the model, and it was probably further afield than people were thinking. It's obviously small, and seems like it's somewhat de-risked.
But can you talk a bit about how that deal originated, how the capital calls would be set up? That would seem if I'm looking at this from a risk perspective, like you control those capital calls, and when would seem like this is kind of the most pertinent detail.
And then in general, like when you think about -- if I think about Seaspan from a high level, what are you building in terms of this kind of go-anywhere bucket? How does this kind of fit in to whatever you guys are -- when you're talking to the Board, what are you telling them you're building when you tax money?
Thank you.
Bing Chen
Okay. Michael, this is Bing.
With regarding to the Swiber investment, first of all, I want to reiterate that as that -- we continue to focusing growing our container ship business. As we said before, that we're looking at the vertically as well as horizontally.
However, our investment -- our capital allocation principle, as I said, one is that we need to make have a risk-adjusted return. Two, is that have to have a business rationale.
Three, is they have to have evaluate the impact on the balance sheet. So those are the criteria that we have been patiently adhere to for whatever the investment that we are making.
And specifically looking at the Swiber, okay, this is an investment were first of all; we're looking at from a business rationale standpoint. The Swiber is a full lifecycle of LNG starting from the LNG purchase, transportation, all the way to consumption to power.
So that is the entire value supply chain of the LNG business. By definition, that the risk of involving entire supply chain is better than involved in a one particular section of this.
So with the LNG business as one of the energy sector, as you know better than most of others, that's the future, and there's a lot of growth perspective. So, from Seaspan's perspective, we're looking at this business, that the business model which is the entire lifecycle, and we're looking at from a shipping perspective today, Seaspan in the shipping.
But if we're looking at expanding into other spaces, in adjacent spaces of the shipping, if and when we decide to look into LNG business, that Swiber will provide a platform to further engage in this business. So that is the business rationale.
And by the way, if you say so what is the Seaspan is there for. I think Seaspan, not only that we have the shipping platform, but also we have a management with my own experience.
And not to say our Chairman's track record in energy business, I think my own experience in managing the life cycle business across the industry, whether it's in commodity, whether it's in specialty finance, whether it's in aviation, I think I have been involved in different stages, whether it's in startup, growth, and restructuring. So that I think with LNG as a business, when we expand into that will be naturally one of the areas that we will also be able to have the ability to contribute to make this a successful business.
So that's the business rationale behind. In terms of the return, I think obviously, we don't disclose the return.
But at the same time, if we are looking at the return it's first of all, we carefully evaluate the risk. Okay, we have -- we believe that we have studied and understood what are the risks, and the second part is the properly structure the transaction to make sure that we manage this risk.
And then thirdly, is that we have to price risk that reflects into the purchase price. So that's what we are talking about in terms of risk-adjusted return.
In terms of the content and components of the investment, and that is as you can get the details from the binding term sheet, which is public information is this first of all, this capital call will only happens when the -- a asset of comprehensive criteria has been met. Basically, the project, it's fully completed, ready to start.
And then, from a funding perspective, I think one is that we have cash in our balance sheet, but also, we have a existing shareholder base as well as since the announcement of this transaction we have received interest from the third party and the customers that who are interested in looking into potential co-investment engine such a investment, so that hopefully answer your question.
Michael Webber
But well a kind of, I guess if I kind of summarize that, do you think LNG specifically is a vertical you may want to expand into further and LIBOR in addition to look looking like you kind of hedge out a lot of the risks is a platform you can potentially leverage going forward. I guess I'm -- I guess into the how this deal originated, why not a PowerPoint in Mexico or we had a disc specifically kind of come to you guys and what about this LIBOR platform makes you think you can leverage it into other businesses, it's not something that's not a platform until I am familiar what I know then the number of core control for a while just curious on that end, and then how it ties into, again what is it LNG going to be a bigger five years now, will LNG potentially going to be a pretty meaningful vertical for you guys.
Bing Chen
Yes, once again, when we are looking at the investment we have to take into those criteria, as I mentioned before, the reason as I mentioned it earlier, we continuously and constantly looking at opportunities within the containership sector. However, for us to make those investments to underwrite any investment we need to make sure those investment firms that return and business rationale prospect and meet those requirements.
So therefore, today we haven't done a -- yes, so therefore the risk.
Michael Webber
The return hurdle, but like there's probably lots of investments that could potentially need to return hurdles, right? So I'm just curious as to why that deal and then what about that platform makes you think you can scale it?
David Sokol
Yeah, well. This is David.
Let me jump in. Actually, I don't think there are a lot of investments around that I'm aware of based on the expertise we have that usually meet the threshold we would go after, so I think this is a -- this LIBOR and the LNG opportunities are one that utilize both our developmental skills that several of us as part of the company now have but also the shipping skills and thirdly, understanding of the Asian activities.
I developed seven different projects throughout Asia, in the energy sector in the 90s, all of which has substantially higher returns than the container shipping industry has and they were long-term 20, 25-year contracts et cetera. So LIBOR provides us a platform and they have spent quite a bit of time during they were initially if you will, a deep ocean construction services company that industry itself with the oil prices, the company was probably at that point over levered and has ended up being restructured.
But during that period, they spent a significant amount of time developing energy projects in Asia, utilizing their relationships and skills that they have from an engineering perspective. And the opportunity came to us through a joint discussion between myself and Fairfax on some activities that we saw as a logical step in diversification for Seaspan.
And so, the one thing, I just to be clear on is we control the draw-downs on those funds. The initial 20 will go in at the conclusion of the restructuring process and will end up owning 80% of a debt free company, which has assets that are significant, the further 180 million only gets drawn as those projects reach financial fruition, which means all the contracts in place, the permits are in place, and a third-party financing for all of the debt side is in place, so we will control the distribution of those other funds.
But as we've sent since the beginning of the year, we intend to diversify Seaspan over time and bring in different long-term stable sources of profitability because frankly, we think it will help enhance the overall credit of the entire holding company and allow us to build a business that's far more predictable, sustainable on the long-term. While staying into -- in the containership business we have an enviable position in that side of the sector.
But again, the Board feels that diversifying the business will bring value to the overall equity base of the company.
Michael Webber
Okay, all right. Now, I appreciate that and again, totally small investment, but it's a -- bit of a departure, so we could get run through it.
David Sokol
Yes, that's -- see you are right, there has been some significant departure but one that we think is important.
Michael Webber
Okay. Now, it's helpful.
Question for really anybody but I think Peter mentioned in his in his commentary around the market, I guess I actually wanted to sort of your earlier questions around some demand what we are saying right now, kind of ahead of terrorists. And I'm just curious to the extent that we are seeing LNG or I'm sorry, we are seeing containership charter rates ease off now, kind of mid period where we are actually seeing some counter cyclical demand fall and you mentioned we've got some larger vessels that are rolling over into 2019, it seems like a pretty difficult mix for 2019 considering this as a pretty, if we are going to see a healthier basis, this probably be it.
So I'm just curious, does that does that play through into how you guys think about counterparty risk and credit risk, is the things that have changed in terms of your metrics are the way you look at some of the mid-year container lines? And is there anything about that scenario that I just kind of laid out that you would kind of big issue with that, we are coming off of it, it's a pretty high base from a containerized base perspective, we are seeing some demand hold, but at the same time it's not enough to keep try to raise some rolling over and we've got some larger vessels getting them via the water next year, that could act as a direct.
David Sokol
Well, yes, yes, I guess you address it a bit to me. I think, well, some of the dynamics you are talking about are happening and we talked about them all this year.
I mean, a couple of area is to be mindful of is, obviously, the cascading if that happens with larger vessels coming into the market that isn't a uniform process. It's one that really needs to be analyzed by route -- to route but it -- that's one factor.
The second factor, I think that's important is as the alliances formed in as the mergers have occurred, you've ended up with a efficiency factor inside of those orders, organizations that has certainly begun to play out this year, but we will continue to play out what I need is obviously when you brake three or four or five or six organizations, either into an alliance or into a single company they can then rationalize their volume capabilities with the ships that they have both ownership of and have charter access to that is a piece of the puzzle that we don't think some other industry participants necessarily have spent enough time thinking about. On the other hand, you've got a significantly reduced order book and continued demand expectations, certainly not of the of the highest high-water marks of the past, but still very significant debate growth going forward in the container shipping industry.
But I think all that says is we see a pretty stable market and one that's getting more solid from a supply demand balance, but we think that continues on, it certainly had an effect and the last several years had an effect. This year will continue to have some effect the next couple of years, but having said that, while we see some categories of ships, for instance the Panamax significantly higher prices earlier this year.
They've come down some, but still more than double what they were in 16 and parts of 17 but on the other hand while we've seen perhaps a 10% reduction from the highs of this year in that sector, we actually have some charters rolling over and the charter and the re-charter arrays substantially higher than the expiring one. So I think it's -- I think you really can't look at this sector and categorize all ships the same, you need to look at the different vessel types who they are deployed by?
What kind of routing they are deployed in? And the efficiency of those vessels in those routes to really get a solid understanding of supply and demand on different ship classes.
So, on balance, I think we saw a substantial strengthening this year, we've seen the normal seasonality coming into the fall. But in some of the larger ship categories, we've actually seen a strengthening, a significant strengthening and pricing on re-chartering.
I think another factor to think about that being in the team have done an extremely good job working with our customers on is our customers need stability and quality services for people like us. And we certainly have competitors that can provide that.
But we have a lot of competitors, that their financial situation is such that it's very difficult for them to provide the quality of service that the customer needs going forward. And I think that's leading to a significant amount of the reason that our team has been able to add a whole number of long-term charters this year, while others are losing them.
It's not that they are bad companies or bad people or anything of that nature. But it's just a fact that if you are a large liner company, you want to work with somebody that you can count on.
If you can either do a three to four-year charter, you want to make sure they are going to be around us three to four years to provide a quality service you need and to work with you as this industry continues to evolve at. I think all those factors together, we are pretty confident I think, obviously this year and next year and I think less concerned than many with the ongoing trade discussions because I think they are a normal process that has to play out, we've seen the North America once play out reasonably positively.
The European ones are in process and the reality is China and U.S. have to find a solution between them.
And it's just going to take time to get there. But it is I think, very unlikely for either country to significantly inflict a huge wound on themselves, in the scheme, if you will, outstanding but the rhetoric is always obviously fills the headlines, but in talking with our customers that I think there's a fair bit of comfort that fair resolutions will be identified well, before they start affecting the credit card.
The bigger issue for our customers, frankly, far bigger than the trade issues is just dealing with the cost of fuel and getting proper recovery with our customers on fuel issues. That's by far a bigger issue facing the customers that we have.
Michael Webber
Okay. I appreciate that.
Now, one more quick one, Ryan you talked about OpEx already coming in book vacation this folder, but it looks like your Q4 numbers actually jumped at 7% or 8% I think off the top of my head, it might be -- can you tell what's driving that or is that just conservatism in the number or did you kind of pull forward to savings into Q3?
Ryan Courson
Yes. So I think if you look over the course of the year.
From Q2, we had elevated OpEx for the reasons that are being spoke about during the quarter, Q3 we went through a number of initiatives to make sure that we were planning and plan maintenance out, procurement initiatives where we realized a bit of savings. And then, Q4 we have a fully delivered fleet of larger vessels compared to kind of earlier in the year and prior years.
And those costs marginally more than the smaller vessels. So I think it's a combination of us doing a thoughtful job in Q3 us moving into Q4 and kind of a normalized basis, and look -- continue to look for cost savings opportunities to where we can find them.
Michael Webber
Okay. All right, thanks for your time guys.
I appreciate it.
Operator
Thank you. Our next question comes from Kevin Sterling of Seaport Global Securities.
Your line is now open.
Kevin Sterling
Thank you. Good morning, gentlemen.
Bing Chen
Good morning.
Kevin Sterling
Congrats on a very solid quarter in particular the free cash flow and operating cash flow. Let me dig in, if you don't mind you talked about signing some contracts with new customers and renewing some existing contracts and industrial expansions, maybe as we think about 2019 and even into 2020, how does the pipeline look for new customers?
Can we expect to see some maybe new customer additions in 2019, how should we think about some of those conversations you're having?
Peter Curtis
Good morning, Ken. This is Peter.
That's a good question, thanks very much. Well, firstly with our traditional customer base, we work very closely with them on several levels company to company.
I think it's one of our strengths emanating from our integrated operating platform which really is all the various sectors of the function of ship operations. From the point of view that we actually supplied to our customers, a significant portion of the operating capacity rather than ship there, so the point being that we have very close relationships at different levels, part of that of course is working with them in terms of the employment needs, near future, medium future and long-term.
That's how we've achieved our growth through construction for employment contracts longer term ones and more recently into our shorter term deals, we as vessels run up into short term employment, we've been able to realize relatively long-term deals for that tonnage. In regards to customers where we have not actually been involved previously, we've canvassed quite widely, part of the growth that I was talking about in say North South trades into regional South trades.
Those are significant areas, if you consider Bing mentioned earlier that we got over that $200 million container moves a year, Europe is some $25 million, Transpacific is some $25 million. The rest of these non -- shall I say non-main periods that might not be the quite the right definition but interregional is very significant, that's well over a third of global moves.
And this is where several of our non-traditional customers or potential customers have been playing, then you match that against improved infrastructure in these other areas and improving supply demand and what you find is that these players are starting to look at life of the tonnage, they migrated from the 500 and 1000 TEUs to some of them that we've actually be got with vessels. So the cascading, I think most of us view as almost in a negative stance, a big ship comes in at the top and then it displaces something lower down we just move and then and so the domino effect goes.
That's push or take but it's actually pull or take happening as well which is due to those infrastructure growth regional growth which demands a larger tonnage or tonnage larger than what they have previously been using which actually is exactly the sector where we have tonnage revenue. That's that is 10% of our revenue, large of our revenues are still on long-term charters.
Hope that helps?
Kevin Sterling
It does, Peter. Thank you very much, appreciate that color.
Let me kind of shift gears here and ask about free cash flow because one of the things that jumped out at me in the quarter was your free cash flow generation, I'm calculating like $136 million of free cash flow looks like the highest I've seen at Seaspan and obviously with your new business model and were you focused on acquiring second hand tonnage versus expensive new built tonnage, were you focused on profitable growth and not just growth for the sake of growth, if we annualize that free cash flow we're north of $500 million on an annual basis, now that might be a little aggressive but in theory as we look at 2019 and 2020, is it reasonable to assume that we could see significant free cash flow generation at least a couple $100 million, just kind of given this reduction we're seeing in capital expenditures and the like, just maybe help us think a little bit longer term about the potential free cash flow generation of the new business model?
Ryan Courson
Yes, Kevin, this is Ryan. So maybe let's break that down in a couple of parts, we have effectively two forms of capital expenditures, the first one is growth capital as it relates to new build vessels and that will flow through the investing activities line item on our cash flow statement.
For the quarter, it was around $5.6 million, that is working through kind of some remaining components of the new builds we had in May of this year and given that we right now have a fully delivered fleet from a order book standpoint that number will decline pretty significantly over time until we announce a new vessel construction or we purchase a vessel. So the other component of our capital expenditures comes in the form of dry docks or special surveys that flows through our cash flow from operations and that's why I said earlier on the call that cash flow from operations is actually a pretty good indicator of how we think about steady state free cash flow on a like-for-like fleet.
The other last component that I talk about there is when we think about free cash flows, you would normally think about it exclude one item that is not in the cash flow from operations would be the preferred dividends which would flow through our financing activities. So I think if you add all of those things up, we will continue to focus very stridently on this cash flow from operations, the year will be the main KPI of our business going forward and you can expect increasing amounts of transparency and communication on that.
Kevin Sterling
Okay, thanks Ryan. Gentlemen, that's all I had and congrats on a solid quarter.
Best of luck to you in 2019, and thanks again for your time.
Ryan Courson
Thanks.
Operator
Thank you. Our next question comes from Ben Nolan of Stifel.
Your line is now open.
Ben Nolan
Thanks. Yes, so I have a handful of questions but one well and they're sort of, they're sort of all over the board honestly but one is it relates to the waiver investment potential, additional investments on the LNG side, could you maybe just frame in a little bit more on that LNG front, when you think is it potential cash calls maybe and when you would reasonably expect developments on that front to begin to flow through?
Bing Chen
Yes, this is Bing. With regarding to the additional investments as I said that there's a very specific list of areas whether it's environmental, finance, EPC contract or the purchaser of the power, the supplier of the power and all these entire what I will call the value chain, all these elements that needs to be ready.
So that's when we will measure against those specific requirements to make sure those conditions are met before any additional investment will be caught and specifically with regarding to LNG once again David mentioned earlier, I think in the particularly in the Southeast Asia and in those island countries, I think they have a shortage significance of a shortage of power and the most environmentally compliant and economically economical solution is to have these LNG to power solutions that is why those are developing. So there is an increasing demand and also there is a market with the current technology and also the supplier for fuels and that is the I will say the market trend in terms of the demand.
So we see that if everything goes as expected. The timeline will be somewhere around one and a half to two years from now.
That will be the net investment will be called.
Ben Nolan
Okay, that was helpful. And then Ryan again, I mean it's been brought up a few times but it really was pretty impressive how much you were able to cut the operating expenses and what at least seems to be a model where that would be hard to do.
I'm curious, how much if any there might be left in that front improving efficiencies and all the other things that you happen to be doing, that are driving those improvements. I mean low fruit is picked at this point or do you think there might still be some more?
Ryan Courson
Yes, thanks for the question. So I explain the transition from Q3, Q2 to Q3 to Q4 as it relates going forward, what would it would like to encourage everyone to think about as we as a management team have a constant improvement mentality and we will always be looking for efficiencies across our cost base particularly on the operating expense side.
Some of our larger buckets are crewing where we hope to find efficiencies over time. The planned maintenance programs that I talked about earlier in the call we think there's some opportunities there as we work through various procurement initiatives and ultimately just better enterprise and institutional practices from the entire cost base.
So what I would say as a fundamental philosophy. We are always looking to operate from a not only a best in class safety and reliability standpoint but do so at the most efficient cost base so
Ben Nolan
Okay. And you would say there's probably still more meaningful improvements that could be made relative to where you are now, I guess is the message correct?
Ryan Courson
Well, I think it's you have to look at it over a long period of time. And like you said our management team is keenly focused on making sure we take those efficiencies when we can.
But we won't do them to sacrifice quality or reliability. And so we are prudent about them and want to make sure that they're sustainable.
So we aren't trying to take cost out in a quarter to hit a cost objective for any specific quarter but we're looking to build a platform with long-term sustainable best practices.
Ben Nolan
Okay, got it. And then it was brought up a little bit ago about your customers being focused on, how they're going to manage their fuel costs going forward obviously with the IMO2020 regulations and one of your competitors announced that some of their customers are effectively paying to have scrubbers installed on vessels that have long-term contracts, curious if you are having those same conversations and if you expect your customers also to be willing to in one form and the other pay for paper scrubbers on the ship.
Peter Curtis
Hi, it's good morning, Ben. It's Peter Curtis here.
Good question. Lot gets said on this topic, so fundamentally with time charters one is that we don't pay for the fuel it's our customers that pay for the fuel.
So the whole object of our own scrubbers is actually things spread between the current fuels that we're burning which we will not be able to unless we have scrubbers and the compliance fuels. So we actually do have some units that are being cut but the customer expert, our approach with customers and we already enable to do these projects but always it's against a contribution and full from our customer base will it be over a period of time or they simply pay for it.
So with we're involved in these discussions quite easy and we have been for some time. Some of segregate the container industry from the others mostly because typically vessels owned by the non-operating owners people like Seaspan are on time charters versus in bulk and tank trades where many of the contracts of wage contracts with the owner actually pays for the fuel.
So we have to look at the net life. We don't see that, we don't believe in space retrofitting our tonnage and all of our discussions would go fairly advanced or against a full contribution from our customers against if we would finance the deal against those right opportunity.
Ben Nolan
Okay, that also took care of my next question. So appreciate it, thanks guys.
Operator
Thank you. Our next question comes from Chris Wetherbee of Citi.
Your line is now open.
Chris Wetherbee
Yes, good morning guys. I wanted to come back to the cash flow question for a second, so you mentioned a bunch of things to sort of think about in the context of cash flow in terms of maintenance CapEx and growth CapEx, just wanted to get a sense of how you think about sort of replacement rate, you have about 100 ships or more, depreciation runs in the 60s, I think on a quarterly basis.
How do you think about that, I just want to get a level set because I know cash flow from ops is sort of a number that you guys want to focus on going forward but what's sort of the way to think about that from managing, for replacement of the fleet?
Ryan Courson
Thanks Chris, this is Ryan. As it relates to replacement CapEx or what would in this case be growth CapEx given the maintenance CapEx of our steady state fleet flows through cash flow from operations, we in general frame everything in terms of the risk adjusted return, so in the container ship business, we evaluate opportunities all the time from a replacement CapEx standpoint that could be a new build opportunity, that could be a second hand vessel acquisition opportunity but all of those decisions are fundamentally grounded in making sure that we're earning the right returns on those capital allocation decisions.
And so, when we think about what the right replacement CapEx is, it's really a function of what returns are available, we don't target allocating capital across any vertical for the sake of allocating capital. It is a returns oriented mindset kind of we put our capital allocation, we make all these decisions.
Chris Wetherbee
Okay, that's helpful. I guess what I'm trying to get at is what I'm thinking about sort of leverage relative to cash flow from Ops, maybe what the sort of right number to think about is if I annualize the third quarter obviously a very strong quarter from a cash flow from Ops perspective, when you guys are around seven times debt to cash flow from Ops, is that the right way to think about how you want to maintain leverage in the context of your depleting assets over time or will there be some other sort of dynamic to think about that I guess I'm trying to make sure, I'm triangulating for this the right way?
Ryan Courson
Yes, I think if you look across what we've already done in the last several quarters, it's been with a strident focus on improving our credit profile and as a management team that's a hugely important strategic imperative for us not only as it relates to making sure that we are able to allocate capital when we need to but it's going to allow us to continue to better serve our customers over a long period of time. And so, our leverage profile again is not set by kind of metrics at any superficial level, we're always evaluating allocating capital, what albeit whether it'd be on the debt reduction side or capital outflow side, from a growth perspective.
Right now, as we've spoken about in the past our de-leveraging strategy, we think has very good returns from a shareholder standpoint, so we will continue to focus on that. So absent growth capital, I think you can expect our cash flows to continue to be allocating, allocated towards paying down our secured credit facilities.
Chris Wetherbee
And do you have a target for leverage right now?
Ryan Courson
No, like you said we have a constant mindset of improving our credit profile, we ultimately think that over the long-term having an enhanced credit profile allows us to more effectively allocate capital and so we will continue to keep that that lens on as we evaluate capital allocation decisions.
Chris Wetherbee
Okay. That's helpful.
I appreciate the color there. I wanted to come back to the earlier conversation around Swiber and I guess just generally speaking about sort of how to think about diversification of the business, it would seem to me as an outside observer this is a viewed first and foremost from a shareholder perspective as a container shipping company and until you get to the point that sort of critical mass outside of container shipping and probably will still be the sort of the manner in which this company is viewed from an investor's standpoint.
So I guess I just wanted to maybe better understand the timeframe as you guys think about sort of diversification of the business because there's going to be sort of a cost period where investments away from container shipping may not necessarily be reflected in the way you are perceived in the market, so if you could give us some help around the timing of the diversification and ultimately maybe what you ultimately wanted to come, will there be a point in the future could you envision, if the opportunity set was rich enough that you could be have container shipping contribution from a cash flow from ops perspective and maybe have something else? Just want to maybe get some better parameters around that?
Ryan Courson
Maybe forward perspective would be the best way on that. First of all, I think you're right I mean it will take time unless an acquisition opportunity happens to arrive at a reasonable price that makes sense for us to diversify our cash flows et cetera in the business.
So I think that just fundamentally, I think that's correct and as the diversification comes purely through developments like Swiber as being said that those developments are one to two years in development and then they're anywhere from 18 to 30 months in construction and so they, so that type of diversification will take time. Having said that, the good news about that type of diversification is the ongoing investment on an annual basis is relatively low until you actually go forward and build the facilities and have everything locked up.
To the extent an acquisition comes along that makes sense, that diversification can happen more quickly. But I think I think the other thing to think about in this though is that our primary investors including management but also obviously Fairfax and Washington Family long-term capital allocation is what both of those companies are all about and the developments of long lived assets are also very significant elements of their expertise as well.
So we think we're well aligned with a large portion of our shareholder base that both diversification, long-term contracted assets in not only the shipping sector or things that we want to pursue but we're only going to pursue them on a appropriate rate of return and us having the expertise to actually execute upon them, we're not interested in trying to take on things that we don't have the proper ability to understand what risk perspective or an execution perspective. So, it will take time.
I don't think it's unreasonable people should look at it first and foremost as a container leasing operating company, the largest in the sector and then as we add diversification to the platform over time people can assess how successfully we've done that but the key focus will be just capital allocation always being and being a balancing act between accreting our credit growing where appropriately in the container business and then and then also growing in a diversified manner as well.
Chris Wetherbee
Okay, that's helpful and I guess maybe just following up on that, I know LNG, I've heard sort of the obviously you guys have sort of made the case about why that makes sense relative to the management teams expertise and risk profile. Are there any other areas that look particularly compelling to you either outside of container shipping and outside of LNG, are there other areas that are at least on the radar from an investment perspective?
Ryan Courson
Probably not at the same level of interest but you're obviously looking at other things which I think is a very good thing to do both in the shipping and in the energy sector but the reality is LNG in any ways its characteristics are very compelling for a good portion of the globe for the next 50 years. And so both with that as a view plus the expertise we have that's certainly are part of the strongest development side.
Chris Wetherbee
Okay, great. Thanks very much for the time this morning.
I appreciate it.
Operator
Thank you. Our next question comes from Randy Giveans of Jefferies.
Your line is now open.
Chris Robertson
Hi guys, this is Chris Robertson on for Randy. Thanks for taking my call.
I had a couple of quick questions modeling type questions and then industry question if you don't mind. So on the G&A expense looks like 3Q number was impacted by couple one-time or short term factors, I know you've given Q4 guidance, but how should we think about a longer term run rate on the G&A side?
Ryan Courson
This is Ryan, so I think the guidance we provided for Q4 is a good indicator of how we think about sustainable G&A for the business.
Chris Robertson
Okay. And then Bing, you mentioned a limited number of vessels that are on spot charters, but in terms of those intermediate Panamax vessels what are the one-year and three-year time charter rates looking like?
How robust is that market? And are you working on securing some time charters for those vessels on spot?
Bing Chen
Yes, in terms of the rate, since June of this year the rate started softening for reasons, part is the seasonality, the other part is that the liners has readjusted their rules and specifically with sudden impacts due to this trade tariffs. In terms of going forward, our views is that as David mentioned earlier that not only that we see that -- we have to look at them from infrastructures perspective, from a cascade perspective and also with our own solutions, for example, that we provide to our customers as we mentioned during the early statement that we will be able to take into consideration our customer needs and then be able to develop the solutions that will allows them to be able to make the commitment for our long-term supply.
And specifically, I think if we're looking at -- for the next year, with the IMO 2020, with vessels might be potentially off the service to -- for the scrubber as well as the continued increase in the regional trade activities which is actually one of the growth areas for 2018 that will continue to be projected for the next year. So we see this sector will continue to have plus and minuses overall.
In terms of the rate, it will be -- so far, I think this is about 10%, 15%, 20% from the high from this year as the next year, I will believe that the way will still be in that range and the demand from that perspective, I think, from our specifically, spot portfolio perspective, we continue to see the interest from our customer from the solutions that the product that we offered to them being able to sign up for a longer term commitment relatively to just providing a vessel to our customer and that's what we will continue to focusing on as Peter also mentioned earlier with both the existing customer as well as some regional players which we will -- we have started to canvas them and we'll start to continue to develop that segment of the year of the customer?
Chris Robertson
Thanks for that Bing. Concerning the China U.S.
trade situation is there an opportunity for other manufacturing nations in the region to kind of capitalize on this and to maybe substitute their own goods and increase trade into the U.S.?
Bing Chen
Well, I think that is a great question. Actually, goods are mobile, so therefore what are the goods that are actually are made in China, it depends on how you define it.
And I think the short answer to that is that other -- I think other developing countries, you know, for example, even Southeast Asia that geographically, they're close to China and they will be able to have the similar workforce or being able to taking on some of those manufacturing capability then being able to continue to supply to the U.S. So I think the actual impact again come back to whether it's a trade or whether it's China I think that's still yet to see.
Chris Robertson
Okay. And then final question for me, just in terms of capital allocation, I know that you guys had mentioned paying off the preferred earlier, how should we think about increases in the dividend maybe over time, the strategy around that or potential share repurchases even?
David Sokol
Yes, a logical question given the quarter -- this is David. The reality is, I think, we pay a very healthy dividend at this point and particularly given the stock's level, so I don't think the board will be considering dividend increases for some time.
I think we still want to keep focused on accreting our credit, because getting our credit moving in the direction of investment grade is really how we bring our fundamental cost to capital down and that'll provide for the greatest amount of growth long-term. So I think shareholders are served at this point by us continuing to use the excess capital to pay down debt and increase our credit quality.
Chris Robertson
I appreciate the comments, thank you guys for your time and congratulations on the really great quarter.
David Sokol
Thank you.
Operator
Thank you. Our next question comes from Mike Gyure of Janney.
Your line is open.
Mike Gyure
Yes, just one quick one for me. Can you talk a little bit about the unencumbered vessel fleet I guess -- there's about 18 vessels, maybe some more color around the size, whether they're market rates, I guess, how you view that as a potential source of capital, et cetera?
Bing Chen
So we have 12 unencumbered vessels now that we'll be increasing to 18 over the course of the next several weeks as the security is released and that was primarily done through this quarter as we repaid a number of secured credit facilities. Those vessels are on a mix between long-term and short-term contracts.
We provide a breakdown of that in our 6K from a specific disclosure standpoint. And that will be out later this week.
Mike Gyure
Great. Thanks very much.
Operator
Thank you. Our next question comes from Mike Yarris of Morgan Stanley.
Your line is now open.
Mike Yarris
Hi. Yes, thank you.
You guys talked about targeting returns, I guess, regardless of specific assets, but wondering what you see today as the most attractive asset within container ships specifically.
Ryan Courson
This is Ryan. From a returns standpoint, again, what I'd like to highlight is that we really look on an opportunity by opportunity basis.
Within the shipping space we see a number of opportunities that come across our desk. And all of them are a little bit different.
I think it's very difficult to apply heuristics across the container ship space, specifically and so when we evaluate opportunities, it is with a returns first mindset with the caveat that we are always keeping our credit profile and the help of that and the improvement of that in mind. But I would say there is no heuristic we could apply on a vessel class or ship by ship basis.
Each opportunity is unique and idiosyncratic.
Mike Yarris
Okay. And I take it you find the LNG market, you expect it to be strong for a long time.
Are you looking at investing in LNG powered vessels or LNG carriers, or how else could you enter the LNG space or participate in that?
Bing Chen
This is Bing. Yes, I think that could be one possibility.
Once again, the key plus is looking at how we allocate the capital and then the returns on those capital based on the risk that is adjusted to it. With regard to LNG, that's an area we look at as -- one is our existing customer today.
They might have, business activities already expanding in -- already in this LNG sector. And the other part is that we have to look at specifically in terms of the prospects of that -- the industry or the sector.
So today if you're looking at the LNGs from a growth and demand perspective, this speaks clearly, there's a brighter prospect in terms of demand globally. China, for example, has made this one of the national mandate to make LNG to be the new energy sources and because of the demand and also the environmental requirement, I believe that the future, the opportunities, is going to be attractive and therefore from investment perspective, I think whether it's in shipping or it's in energy to power, so that's what we're looking at this LIBOR.
Again, this is one of the platforms that allows us to be able to evaluate LNG along with this value chain to see which component -- which part of this value chain is the best and that from a risk and also from a return perspective.
Mike Yarris
Okay. And then, I apologize if I missed it earlier, what do you expect demand growth to be in 2018 and 2019, let's say if the 25% tariff is implemented at the beginning of next year?
Bing Chen
The impact if the 25% is fully implemented will be additional about 1.5% impact.
Mike Yarris
And what do you expect total containership demand to be then in 2019?
Bing Chen
It's about 3 million -- 300.
Mike Yarris
The growth -- sorry, year-over-year?
Bing Chen
It's about 3% -- 3% to 4%.
Mike Yarris
Perfect. Thank you, guys.
Operator
Thank you. Ladies and gentlemen, this concludes today's question-and-answer session.
I would like to turn the call back to Bing Chen for any closing remarks.
Bing Chen
So, thank you everyone for participating in today's call, and have a great day. Thank you.
Operator
Ladies and gentlemen, this concludes today's presentation. Thank you for participating.
Everyone may now disconnect, and have a good day.