Adam Roszkowski: Got it, thank you. Then just a last follow-up, maybe just talk about day rates, where they are now versus a year ago, and how you see that progressing; then on the trading revenue side, they were down, but maybe just give some color, are liners looking to unload more boxes right now, and just help me think through that.
Brian Sondey: Yes, so maybe just when it comes to market leasing rates, we saw market leasing rates reach all-time record levels in 2021 and the very early days of 2022, just because box prices were very high, close to two times the average for box prices. Since, I’d say, summer of 2022, we haven’t seen a lot of leasing activity. Customers, as I was saying, are generally over-boxed, and where we do see activity, it’s very small. Shipping lines might have some requirements on a location and day basis just because they ran out for whatever operational reasons in certain locations. But rates have come down and so I think the best thing to look at is new container prices, and new container prices peaked at close to $4,000 in either late ’21 or early ’22.
We estimate right now–we haven’t bought containers for a while for the leasing fleet, but we believe it’s in the range of $2150 or so, $2200 for new container prices. That’s up a little bit from where it was at a low point, perhaps in October-November, but that means lease rates–you know, when the market tightens and we start doing transactions again, it will be centered around wherever container prices happen to be at the time.
Adam Roszkowski: Got it, thanks for taking my questions.
Operator: Our next question will come from Liam Burke with B. Riley. You may now go ahead.
Liam Burke: Thank you, good morning Michael. Good morning Brian.
Brian Sondey: Good morning.
Liam Burke: Brian, has there been any discussion–I know the liners are–or the container shippers are pretty strong in terms of balance sheet, so there’s not a lot of fussing there. But is there any talk of any change in duration or rate on existing contracts?
Brian Sondey: Yes, so maybe just as you point out, one of the things that is very nice at this point in the cycle is that in prior down cycles in the shipping industry, there’s always a lot of questions we get from investors, and obviously we look very carefully too on the credit condition of our customer base, and just the profitability and also de-leveraging that happened in the shipping industry has been extraordinary. We look at the credit of our customers as being in great shape despite the fact that they’re heading into a more challenging period. Also, it’s worthwhile noting for our customers too that when people talk about what’s going on in the shipping cycle, the ship orders have a very different order cycle than containers, that we expect to see the vessel fleet continue to grow in 2023 and ’24 where we’re already seeing the container fleet shrinking, so again it’s that kind of core difference in the cycle for our market relative to the cycle for our customers, the shipping lines.
In terms of the focus on lease durations, we’ve actually found that over the last number of years, and we think it’s going to continue, that there is kind of a win-win thing we’re seeing, where customers are willing to keep containers on hire for longer periods of time, primarily on life cycle leases for used equipment. We like that because it takes volatility out of our business and gets us extra revenue years. The customers do it for several reasons, not just because we push for it, but we’re able to give the customers discount on the per diem rates in return for extra years of duration, just because we think of the re-leasing activity and the renewals on an NPV basis. Then also, we’re able to give our customers much greater logistical flexibility which can have real back haul savings for them, given our ability to sell container all over the world, in particular in inland locations, and so we’re just kind of seeing this general migration where maybe in the past, we had put a container on a long term lease at the beginning and then several iterations or shorter leases, where now it really has become kind of a two-step model, an initial lease for new equipment that goes from in normal years, five to eight years last year or 2021, out to kind of 11, 12, 13 years, and then very often either the renewal of the pick-up of used equipment is onto a life cycle lease that, in many cases, can carry out well past year 15.
Liam Burke: Great, thank you Brian. Michael, 12% of your debt is not fixed. How do you look at that in terms of capital allocation vis-Ã -vis the dividend and the buybacks?
Michael Pearl: I think most of our fixed and floating is just driven by our lease portfolio. We do try to hedge pretty much all of our long term leases and finance leases to make sure that the debt that’s financing those containers is locked in as the revenues are locked in, so that’s really how we manage that kind of fixed-floating balance, which is why it’s in that upper 80% category, which is also generally aligned with what our lease portfolio looks like.
Liam Burke: Right, but during the year last year, you did reduce–I mean, your net debt was reduced ’22 over ’21. Is there any thought on the portion that is not fixed or hedged, on reducing that, or are you going to maintain certain levels of debt for capital efficiency and then just buy back stock or pay dividends?
Michael Pearl: Our leverage has been–I’d say leverage has been pretty consistent. That’s something, I think as Brian mentioned, that we are able to use tremendous cash flow to not only increase our buybacks or buy back at a high level, but also de-lever a little bit throughout the year, so that’s kind of one decision point. I think how much is fixed or floating is more driven by the characteristics of our lease portfolio, if that makes sense.
