Seaspan Corporation (ATCO) is the largest independent owner and manager of containerships in the world. The company currently manages 114 vessels, which includes 10 that are under construction. For comparison's sake, its fleet is more than 50% larger than rival Costamare (NYSE: CMRE), which currently has 72 vessels in its fleet. Overall, Seaspan Corporation, like Costamare, makes money by leasing these ships to shipping companies under time charters.
A closer look at Seaspan Corporation's charters
Seaspan Corporation has secured long-term time charters for the bulk of its fleet. Overall, 94% of its revenue comes from these long-term contracts, while the other 6% comes from short-term agreements, primarily on the smaller vessels in its fleet. As of the end of the first quarter, the company had secured $5 billion of contracted revenue, with the remaining term averaging more than five years. These agreements provide the company with relatively predictable revenue quarter after quarter.
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For example, the company has eight 13,100 twenty-foot equivalent unit (TEU) ships leased to shipping giant COSCO under 12-year charters that pay it a daily rate of $55,000 and eight 8,500 TEU ships hired under 12-year contracts with three one-year options that pay it $42,900 per day. As long as nothing out of the ordinary happens, such as an unexpected drydocking or bankruptcy, Seaspan Corporation stands to collect those rates until the contracts expire.
That said, while the bulk of the company's fleet operates under long-term time charters, Seaspan Corporation does have several vessels under shorter-term market rate contracts, which it expects will supply 6% of its revenue this year. Many of its smaller 4,250 TEU Panamax-sized ships operate under these short-term contracts, which has proven to be a problem over the past year because market rates sank below the industry's break-even point after hitting record lows of around $4,000 per day. That said, rates have recently rebounded to above $10,000 per day, which should provide a revenue boost in the coming quarters.
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Predictable revenue until something unpredictable happens
Because long-term contracts underpin the bulk of Seaspan Corporation's fleet, its revenue typically rises as it adds new vessels into the fold. That was the case last year, when revenue increased by 7.2% to $877.9 million after it added two more vessels to its operated fleet. That said, revenue in recent quarters has declined. In the fourth quarter, for example, revenue slipped 2.4% from the year-ago period to $213.2 million, and it continued sinking in the first three months of 2017, falling 6.6% year over year to $201.3 million.
One of the drivers of that decline was the previously noted drop in rates for ships employed under short-term contracts. Costamare, likewise, experienced a decrease in revenue in recent quarters due to the same issue as well as its strategic decision to recycle several older boats.
In addition to that, Seaspan Corporation also took a direct hit to its long-term charter revenue last year, when South Korean shipper Hanjin filed for bankruptcy. At the time, it had four vessels chartered with Hanjin, including three under long-term contracts. As a result of that bankruptcy, Seaspan Corporation had to take back its ships, which led it to record $19.7 million of additional expenses, including writing off past-due revenue from those contracts. While the company has since found new charters for three vessels (it sold the fourth one to a ship recycler), the new contracts are for a lower dayrates in the short term than it was earning with Hanjin. However, the new customer has the option to extend those contracts in the future at higher rates than Seaspan was collecting on the original contract with Hanjin.
Investor takeaway
Seaspan Corporation makes most of its money by leasing ships to the world's largest shipping companies under long-term time charters. At the moment, the company has $5 billion of revenue lined up, which it should collect over the next several years. Because of that, as long as its customers continue paying their bills, Seaspan should keep pulling in a boatload of money from these agreements.
