December 8, 2006

Since its IPO in July 2005, Seaspan CEO Gerry Wang and CFO Kevin Kennedy have delivered on their promise to investors. For example, they have grown Seaspan’s fleet, diversified the customer base, and most importantly, increased the annual dividend from $1.70 to $1.79 per year.

Another promise was that Seaspan would eventually return to the equity markets to finance its steady growth. Therefore, we were not surprised on October 25th when Seaspan announced it was selling an additional 10 million shares in a registered offering. The shares were priced attractively at $21.50. This price was only slightly above its IPO price of $21 and offered an attractive dividend yield of 8.3%. We believe the dividend is safe given the long term, fixed rate nature of its contracts. It should also be noted that Seaspan’s contracts are signed at below market rates. Therefore, if any of its customers fail to honour their contract, Seaspan can re-charter its vessels at higher rates with shorter long term contracts.

After carefully reevaluating our investment thesis, we decided to purchase additional shares of Seaspan for our five ABC funds. Additionally, as net asset investors, we calculate that Seaspan trades at a significant discount to its estimated net asset value of $30 per share. Overall, Seaspan is an investment which provides a steady dividend, while at the same time; it has potential for significant capital appreciation as management continues to effectively execute its growth strategy.

April 5, 2007

Despite recent turbulence in global stock markets, shares of Seaspan enjoyed a modest rally in the first quarter of 2007. After trading between $20 and $22 for most of 2006, shares of Seaspan have quietly climbed to over $27 a share over the past few months. A lot of the credit should go to CEO Gerry Wang and CFO Kevin Kennedy. They have done an excellent job transitioning new vessels into operation and continue to sign up new customers to long term fixed rate charters.

On March 30th, Seaspan announced that it had signed contracts to build two 2500 TEU vessels to be delivered in 2010. Seaspan has contracted these ships to Kawasaki Kisen Kaisha of Japan under a 10 year charter at $18,000 a day. Each new vessel is expected to contribute between $4.5 and $4.9 million in annual cash flow before interest costs. More importantly, this agreement adds yet another world class liner operator to Seaspan’s list of customers. This diversified customer base reduces Seaspan’s reliance on any one lessee and opens the door for Seaspan to win additional business from that customer in the future.

Although shares of Seaspan have moved higher we believe they represent good value. With the cost of building a new ship rising to over $18,000 per TEU, the replacement value of Seaspan’s fleet continues to increase. We calculate the cost to rebuild Seaspan’s entire fleet from scratch would cost over $2 billion or roughly $31 per share after debt. Moreover, Seaspan’s dividend yield of 6.6% is quite appealing given today’s low interest rate environment of only 3%-5%. But more importantly, we believe that as investors become more comfortable with containership leasing, a relatively new asset class to the public markets, Seaspan could become the beneficiary of significant investor interest.

July 20, 2007

On July 18th, Seaspan announced second quarter results for the period ending June 30th 2007. During the quarter, revenue increased 75% to $48.9 million. The increase was mainly the result of 11 vessel deliveries which contributed an additional 948 operating days in the quarter. Free cash flow, or cash available for distribution, increased 79% to $27.1 million compared to $15.1 million in the second quarter of 2006. It is evident that Seaspan is beginning to benefit from greater economies of scale as it increases the size of its fleet.

In addition, Seaspan continues to build on its existing relationships. On May 14th, the company announced that it had contracted to purchase eight new vessels at an estimated cost of $1.1 billion. The containerships will be chartered to COSCO Container Lines for twelve years at a charter rate of $42.9 thousand per day. Once the vessels are delivered in 2010, they are expected to contribute between $105 and $109 million in additional EBITDA and be free cash flow accretive.

So far this year, shares of Seaspan are up roughly 55%. It seems investors have become more comfortable with the company’s business model and the ship leasing industry in general. Since its IPO, Seaspan’s dividend yield has fallen from 8% to 5%. At this level, its yield is now comparable to the average yield on Pipeline and Tanker MLPs. Even so, it appears many people are just now catching onto the story. On July 2nd, Barrons ran a story on the stock, and a number of Wall Street firms have recently initiated coverage. In addition, as Seaspan’s market capitalization continues to increase, it may begin to attract the attention of some mid and large cap funds.

Finally, while Seaspan continues to be viewed primarily as an income stock, Wall Street may be underestimating the company’s significant growth potential. With 26 containerships already contracted to be delivered over the next three years, management believes EBITDA should grow from $150 million in 2007 to $370 million by 2011. It is important to keep in mind as well that these projections do not include future accretive acquisitions. Looking ahead, we expect Seaspan to continue to be active in signing new charters. In fact, CEO Gerry Wang believes Seaspan can double its fleet to over 100 ships in the next three years. If Seaspan can continue to effectively execute its strategy its shares could show significant further capital appreciation.

September 21, 2007

Earlier this year, Seaspan CEO Gerry Wang established an ambitious plan– to grow the company’s contracted fleet to 100 containership vessels by 2010. With the announcement last week that it was purchasing eight new 13,100 TEU vessels from Hyundai Heavy Industries, it appears Gerry is on track to meeting this goal.

Seaspan’s total contracted fleet, which consists of ships currently in use and those that are under construction, now stands at 63. This is up from just 41 at the time of its August 2005 IPO. Consistent with the company’s business model, these eight new vessels will be chartered out under long term fixed rate charters. In this case, Seaspan is chartering the vessels to China-based COSCO, one of the largest shipping companies in the world. The economics of the agreement are attractive. The charter is set for 12 years and the rate is fixed at $55,000 per day. Upon delivery in 2011, Seaspan’s EBITDA should increase by over $136 million per year.

It is interesting to note that at 13,100 TEUs, these eight new containerships are considerably larger than any vessels currently in Seaspan’s fleet. Presently, Seaspan operates ships that range in size from 2500 to 9600 TEUs. Management believes however, that these super-sized ships, while relatively new to the industry, are quickly becoming the standard. The most obvious advantage is the incredible economies of scale that are achieved in construction. While they may carry a higher total cost, we calculate the per-TEU price tag is approximately one third lower than the next largest sized vessel.

So what does this all mean for Seaspan shares? Interestingly, less than half of Seaspan shares are currently held by institutional accounts. But this could soon change. Given the pace of new charter signings, and the 32 new vessels expected to be delivered over the next four years, we believe the perception of Seaspan could begin to shift to that of a growth stock. This would attract the interest of a large, new set of investors. In addition, with Seaspan’s market cap now at roughly $1.6 billion, it could be catching the eye of some mid and large cap funds.

Furthermore, as net asset value (NAV) investors, we continue to monitor the value of Seaspan’s fleet. Given the rising costs of materials and labour, we calculate that Seaspan is currently trading at a 10% discount to its replacement value of around $35 per share. In addition, as Seaspan brings on new vessels at already negotiated prices, its NAV per share should continue to rise. Finally, investors should not rule out the possibility of a dividend increase in early 2008. The company currently pays an annual dividend of $1.79 per share, which represents an attractive yield of 5.5%. However, Seaspan’s distributable cash flow per share has increased this year, and a dividend increase would be consistent with the company’s policy of providing steady and increasing dividends to shareholders.

December 14, 2007

On October 18th, Seaspan announced third quarter results for the period ending September 30th 2007. During the quarter, revenue increased 80% to $54.2 million compared to the third quarter of 2006. The increase was mainly the result of 12 vessel deliveries which contributed an additional 1058 operating days in the quarter. Free cash flow, or cash available for distribution, increased 79% to $29.7 million compared to $16.4 million in the second quarter of 2006. It is evident that Seaspan is beginning to benefit from greater economies of scale as it increases the size of its fleet.

In addition, Seaspan announced that beginning next year its dividend will increase 6.1% from $1.79 to $1.90 per share. This represents the second increase in Seaspan’s dividend since going public in 2005. Based on a $1.90 dividend, shares of Seaspan now yield an attractive 7.6% and its yield appears generous when compared to other asset classes such as MLPs, REITS, etc. Although many investors may regard Seaspan as a yield play, we believe that the market is underestimating the company’s significant growth potential.

With 30 containerships already contracted to be delivered over the next three years, Seaspan’s CFO, Sai Chu, believes EBITDA should grow from $150 million in 2007 to around $500 million by 2012. It is important to keep in mind that these projections do not include future accretive acquisitions. Looking ahead, we expect Seaspan to continue to be active in signing new charters. In fact, CEO Gerry Wang believes Seaspan can double its fleet to over 100 ships over the next three years. In summation if Seaspan can continue to effectively execute its growth strategy we believe that its shares will eventually be recognized by a wider audience of investors.

April 11, 2008

On February 19th, Seaspan announced fourth quarter and full year results for the period ending December 31st 2007. During the quarter, cash available for distribution increased 35.7 % to $31.9 million compared to $23.5 million a year earlier. The increase was mainly the result of 6 vessel deliveries which contributed an additional 552 operating days in the quarter. For the full year, cash available for distribution improved 68% to $114.4 compared to $68.0 million in 2006. Ship operating expense increased by 55.7%, or $4.6 million, to $12.9 million in the quarter, from $8.3 million in the comparable prior year's quarter.

On April 7th, Seaspan announced that it would issue an additional 7 million shares to the public with another 1.1 million available to underwriters. This is Seaspan’s fourth financing since it’s IPO in 2005. What we found interesting, however, was that for the first time since its IPO, Seaspan’s executives will be participating in the deal. They are expected to invest an aggregate of $18.1 million of their own money at the same price as the public. We view this commitment as a positive signal that Seaspan’s prospects look bright and that its shares are currently undervalued.

In addition, Seaspan has also secured $235 million in term financing at an attractive rate of just 60 basis points above LIBOR. More importantly, it should be noted that due to recent adverse credit conditions, some of Seaspan’s competitors are either unable to borrow or must do so at less attractive rates. This is an important differentiating factor which results in financial flexibility and a low cost advantage for the Company. Armed now with close to $1.5 billion of capital, we believe Seaspan can be opportunistic over the next 6 to 12 months in acquiring new vessels. It is possible that some ships may even be acquired from competitors who cannot get access to financing and must sell at distressed prices.

In January, Seaspan’s Board of Directors announced a dividend increase of 6.1% from $1.79 to $1.90 per share. This represents the second increase in Seaspan’s dividend since going public in 2005. Based on a $1.90 dividend, shares of Seaspan now yield 6.7%. This is attractive given that similar asset classes such as REITS and MLPs trade at lower yields. In fact, while many investors may regard Seaspan as simply a yield play, we believe that the market is underestimating the company’s growth potential as well as its net asset value. With 39 containerships already contracted to be delivered over the next three years, EBITDA should grow from $150 million in 2007 to around $500 million by 2012. We believe this would allow Seaspan to eventually pay a dividend of $2.50 per share. Also, with regard to tangible assets, Seaspan is currently trading at an 18% discount to our $33 per share calculation of net asset value. In summation, if Seaspan can continue to effectively execute its growth strategy we believe that its shares will eventually be recognized by a wider audience of investors.

August 1, 2008

Extreme negative investor sentiment in addition to lingering concerns about rising oil prices, a slowing global economy and a deteriorating credit market have undoubtedly impacted shipping stocks in the months of June and July. Although Seaspan has been lumped in with this group, we believe investors should keep the following points in mind.  First of all, Seaspan is a leasing company, and while it does own its fleet, it is not responsible for the fuel to run the containerships. Thus, higher oil prices have no direct impact on its operating costs. Second, Seaspan signs its customers to long term contracts (10 to 12 years) at fixed rate charters. Therefore, Seaspan is completely insulated from short term changes in spot market rates. Over longer periods of time, charter rates tend to rise however Seaspan’s earliest charter renewals don’t occur until 2013.  Consequently, Seaspan has locked in a profitable spread between its costs and revenues. Finally, although credit markets remain relatively tight, Seaspan is currently well capitalized, has excess debt capacity, and has proven it can access both the debt and equity markets on attractive terms.  

In fact, Seaspan should eventually benefit from the current environment. First of all, due to recent adverse credit conditions, some of Seaspan’s weaker competitors are either unable to borrow or must do so at less attractive rates. Second, many speculators who ordered new ships in 2005-2007 on easy credit hoping to sell for a quick profit may have to walk away from their purchase options. This may allow Seaspan, currently armed with over $850 million of excess debt capacity, to make some opportunistic purchases over the next 12 months at attractive prices.

On July 30th, 2008, Seaspan announced second quarter results for the period ending June 30th 2008. During the quarter, cash available for distribution increased $5 million or 17.9% to $32.9 million from the prior year’s quarter. The increase was mainly due to a 10% increase in the number of vessel operating days from 2,404 to 2,656. Normalized earnings, which adjust for non-cash gains or losses on interest rate swaps, increased 23.8% to $19.3 million from $15.6 million in the prior year.  Investors seemed pleased with these numbers as shares of Seaspan rallied $2.00 or 9.2% the following day to close at $23.78 per share.

Despite this rally, we believe shares of Seaspan remain an attractive investment. Based on its annual dividend of $1.90 per share, shares of Seaspan now yield approximately 8.0%. This compares favourably to similar asset classes such as REITS and MLPs which trade at lower yields. In fact, while many investors may regard Seaspan as simply a yield play, we believe that the market is underestimating the company’s growth potential as well as its net asset value. With 39 containerships already contracted to be delivered over the next three years, EBITDA should grow from $150 million in 2007 to around $500 million by 2012. We believe this would allow Seaspan to eventually pay a dividend of $2.50 per share. Also, with regard to tangible assets, Seaspan is currently trading at a 29% discount to our $33 per share calculation of net asset value. In summation, we believe shares of Seaspan are attractive for the following reasons.

1. It is a dominant and growing player in the attractive ship leasing industry
2. A unique business model which produces a steady stream of predictable cash flow
3. It has an attractive yield of approximately 8%
4. Management is capable, experienced and conservative
5. It trades at a discount to Net Asset Value and Replacement Value. 

September 12, 2008

Since our last update on August 1st, Seaspan shares have been extremely volatile. After reaching a high of $25.99 on August 14th, the shares then fell as low as $21.65 on Sept 9th. This represents a 20% swing in market value in just 26 days. What was interesting to us was that within this time, virtually nothing had changed with respect to Seaspan’s net asset value or business conditions in general. Therefore, we think Seaspan is a good example of how today’s markets are being driven by investor psychology: i.e. fear and greed.

With an annual dividend of $1.90 per share, shares of Seaspan are now yielding around 8%. We believe this dividend is very secure as Seaspan’s current fleet of 30 containerships are leased out under fixed rate, long term charters producing a steady and predictable stream of cash flow. In addition, Seaspan has an additional 38 vessels under construction which will be delivered over the next three years. All of these ships are already committed to long term charters. Overall, we estimate that these new ships could eventually contribute an additional $0.60 per share to Seaspan’s dividend.

On a final note, for those who missed it, Seaspan’s CEO Gerry Wang made a guest appearance on CNBC on Thursday September 11th. We’ve provided the link for you below.

http://www.cnbc.com/id/15840232?video=852247338&play=1

October 10, 2008

Despite worldwide central bank easing, a $700 billion fiscal bailout package and billions of dollars in public bank capital raising, credit markets remain frozen. As a result, the shares of companies which rely on the credit markets have been especially hammered. A good example of this is Seaspan Corp.

Over the past 6 weeks, Seaspan’s shares have fallen 51% due to fears about a global economic slowdown, and concerns regarding its ability to obtain funding to purchase its 36 vessels on order. This equates to roughly $2.5 billion in funding required between now and 2011. It should be stated however, that Seaspan currently has $2.3 billion of committed debt capacity remaining, covering virtually all its vessels on order. In addition, its largest shareholder and partner, The Washington Group, could provide equity capital if necessary.

Seaspan shares are now yielding an incredible 14.8%. We believe the dividend is safe as Seaspan’s revenues and expenses are fixed due to its long term charter and management fee arrangements. In addition, we believe Seaspan’s customers will continue to honour the terms of its leases. Keep in mind that Seaspan’s customers are large public companies, with excellent credit ratings and credit history. More importantly however, Seaspan’s contracted long term charter rates remain below current market rates, so we see little incentive for lessees to break their charters.

October 31, 2008

Yesterday afternoon, Seaspan reported third quarter results for the period ending Sept. 30th 2008. Third quarter and year to date highlights include:

1. Declared a third quarter dividend of $0.475 per share to be paid on November 14th to all shareholders of record as of Nov 5th 2008.
   
   
2. Generated $33.9 million in cash available for distribution for the quarter, an increase of 11.5%, or $3.5 million from $30.4 million for the prior year’s quarter.
   
   
3. Reported revenue of $57.5 million and $166.8 million for the three and nine months ended September 30th respectively.
   
   
4. Reported increased net earnings (excluding non cash loss from interest rate swaps) by $2.8 million, or 17.1% to $19 million for the quarter from $16.2 million for the comparable prior year’s quarter.
   
   
5. Raised approximately $228 million in net proceeds from the April 2008 common stock offering.
   
   
6. Entered into a $235 million credit facility agreement with Sumitomo Mitsui Bank and others.

With a 17% dividend yield, many investors are concerned about Seaspan’s counterparty risk – that is, the chance that one of its lessees breaks their lease.  At this time, we believe this is unlikely for the following reasons.

1. Although charter rates have fallen, Seaspan’s customers have long term fixed rate charters in place that are priced well below even today’s depressed levels.
   
   
2. World Maritime law is well established and carries stiff fines and penalties for missing lease payments.  In addition, in the event a lease payment is missed, Seaspan would have the right to confiscate all the cargo on board its ship. Often the cargo is more valuable than the ship itself and thus provides a reassuring margin of safety to Seaspan.
   
   
3. Seaspan’s customers are large public companies with long histories. They have strong balance sheets and have cash in the bank. In addition, the amount that could be saved by breaking a lease would be far less then the eventual reputational damage that would occur as a result.

Seaspan conducted a public conference call for investors last night. We have provided a link to the replay below for those interested in having a listen. The call can be found under “archived events”: http://www.seaspancorp.com/investors/events.cfm

April 9, 2009

During the credit crisis and the ensuing stock market collapse, shares of companies that were dependent on access to capital were particularly hard hit. Both credit and equity markets effectively closed after the bankruptcy of Lehman Brothers on September 15, 2008. Seaspan, which requires capital to build out its fleet, fell from a 52-week high of $28.74 per share to a low of $4.37 per share in November. The 85% decline has thankfully reversed course and the shares have since rebounded almost 120% to trade at $9.50 today.

Several positive news releases have apparently soothed nervous investors. First, on January 16, 2009 (and despite the turmoil in the financial markets) Seaspan paid its dividend of $0.475 for the fourth quarter. Although the 20% yield on the stock implies that this payout is not sustainable, at least investors picked up another nice dividend cheque. Second, Seaspan entered into an agreement for a $200 million preferred share issue that was purchased by members of the Washington family and Graham Porter, who are co-founders of the Company. The preferred shares pay a non-cash dividend, which accrues at a rate of 12% per annum until January 31, 2014. If the preferred shares have not converted into common shares at an exercise price of $15.00 on or after January 31, 2014, the rate will increase to 15% per annum. This should give management some decent incentive to keep the share price moving in the right direction over the next five years and removes the need for an equity issue in 2009.

Finally, Seaspan reported reasonable operating and financial results for fiscal 2008. Although the Company reported a large loss due to non-cash unrealized losses on interest rate swap agreements, the normalized EPS was essentially unchanged year over year. For fiscal 2008, Seaspan reported earnings per share of $1.19 compared to $1.18 in 2007. Importantly, cash available for distribution increased by 19% to $136.2 million compared to $114.5 million in 2007. Gerry Wang, CEO, stated, “During a challenging economic environment, the Company continues to perform as expected based on its fully contracted fleet with high quality counterparties and its ability to achieve strong utilization rates for its fleet of modern vessels. Notably, our customers continue to perform as expected and 100 percent of Seaspan’s fleet remains on time charters with no renewals until 2011 at the earliest.” Because the Company’s business model is based on long term fixed rate charters, we believe that nervous investors simply oversold the shares last November. We look for the shares to continue to stabilize as the global economy begins the slow process of recovery.

May 22, 2009

After recovering nicely from a low of $4.37 last November, shares of Seaspan had an unfortunate setback with the release of the Company’s first quarter results.  On a positive note, revenue increased to $63.1 million for the first three months of the year versus $54.2 million for the comparable period last year.  Cash available for distribution increased to $34.8 million, or 8.4%, from $32.1 million a year ago.  However, the Company reported normalized earnings per share of $0.25, down 16.7% from earnings per share of $0.30 in the first quarter of 2008.  Note that normalized earnings are adjusted for non-cash items such as the change in fair value of financial instruments, write-off on debt refinancing, interest expense and interest expense at hedge rates.

Unfortunately, Seaspan’s management made the difficult decision to cut the quarterly dividend from $0.475 per share to just $0.10 per share.  We had alluded to this possibility in our most recent comment on April 9th: “although the 20% yield on the stock implies that this payout is not sustainable, at least investors picked up another nice dividend cheque”.  Management called it a “temporary” reduction, which allows Seaspan to “reduce its overall equity needs by approximately $320 to $360 million and maintain a quarterly payout to its shareholders”.

To be honest, we were more surprised at the violent reaction in the stock market to the news, as the shares fell approximately 35% on the day.  Investors really shouldn’t have expected management to continue to pay such a high dividend given the Company’s capital requirements.   Seaspan requires approximately $500 million to $600 million over the next 24 to 30 months, starting late 2010 to early 2011.  In any case, we believe that the current level of dividend payments is now both appropriate and sustainable.

Now that the market has reset its expectations, we want to highlight a couple of positive points.  First, Seaspan has just taken delivery of its fourth new container ship in 2009.  The ship is chartered to Compania Sud Americana de Vapores (CSAV) under a six-year, fixed-rate agreement that requires CSAV to pay all fuel, cargo-operating and related costs.  It is good to see that ships are still being delivered on attractive terms and at fixed rates, which generates stable cash flow to Seaspan.  Second, we take comfort in fact that Dennis Washington, a co-founder of the Company, purchased 877,670 shares in May at a range of prices from $5.66 to $6.31 and now owns 7.66% or 5,145,696 of the common shares.  We are always impressed when management steps up with their own money to show confidence in their Company.  As investors come to accept the lower yield and global trade rebounds from recessionary lows, shares of Seaspan should stabilize and begin the slow process of recovery.

May 7, 2010

After the difficulties experienced during the credit crisis and the ensuing market collapse, Seaspan seems to have stabilized.  The Company recently released operating and financial results for fiscal 2009 that were supportive of the share price rally from a 52-week low of $5.12 to approximately $10.50 today.

Operationally, Seaspan accepted delivery of seven vessels in 2009 and five vessels thus far in 2010, for a total fleet size of 47 container ships.  The average age of the fleet is five years and all are secured on long-term charters with an average duration of approximately seven years.  With a focus on high-quality counterparties, the contracted fleet achieved utilization of 99.7% in 2009.  Financially, this translated into normalized net earnings of $78.5 million or $0.95 per share compared to normalized net earnings of $76.2 million or $1.19 per share in 2008.  Reported earnings in 2009 were much higher, coming in at $145.3 million or $1.94 per share due to a positive change in the fair value of financial instruments.  On the back of these results, Seaspan’s board of directors declared a $0.10 per share dividend for the first quarter of 2010.

The key issue surrounding Seaspan has always been the Company’s ability to fund the future growth of its fleet.  As at December 31, 2009 the Company was contracted to take delivery of 26 newbuilds over the next 26 months.  The balance owed for these ships amounted to approximately $1.7 billion and the Company expects to require $180 million to $240 million of equity between the fourth quarter of 2010 and the second quarter of 2012.  Obviously, the health of the overall equity markets is crucial to the Company’s future.  However, should it all play out successfully, contracted revenue is expected to grow to approximately $7 billion.  Management is confident in reaching this projection since the Company has already entered into a fixed rate charters for each of the yet-to-be-delivered vessels.

Notwithstanding this past week’s turmoil related to Greece and the Eurozone, we are generally constructive on equity markets over the next few years.  Therefore, we believe that patient shareholders can continue to hold the stock, collect the dividends and wait for management’s growth strategy to play out.

July 29, 2011

2011 has been an eventful year for Seaspan.  On June 30th, 2011, the company accepted delivery of its second 13,100 TEU containership, representing its seventh delivery in 2011.  Seaspan’s contracted fleet of 69 containerships includes 62 that are in operation and seven containerships scheduled for delivery through March 2012.  All of the seven vessels to be delivered to Seaspan are committed to fixed-rate time charters of 12 years in duration from delivery.  Seaspan also recently formed a containership investment vehicle with The Carlyle Group, which may invest $900 million of equity capital primarily in newbuilding vessels that are strategic to Greater China.  From a financial perspective, Seaspan has issued a total of $350 mm of cumulative redeemable perpetual preferred shares in 2011, which may be used to fund future acquisitions or investments.

On May 5th, 2011, Seaspan reported its Q1 2011 financial results.  Vessel utilization increased to 98.9% versus 97.2% in Q1 2010, while year-over-year revenue and EBITDA increased by 50.5% and 55.7%, respectively due to an increase in the number of operating days.  In connection with its Q1 results, Seaspan increased its quarterly dividend by 50% to $0.1875 per share from $0.125 previously, such that the stock now provides an annualized yield of 5.5%.  Going forward, management reiterated its intent to pursue a progressive dividend policy given the expectation of significant growth in cash available for distribution. 

December 16, 2011

On December 13th, Seaspan announced that it had commenced a tender offer to purchase up to 10 million shares at a price of $15.00 per share. The offer represents a 43.5% premium to the previous day’s closing price of $10.45 per share and could reduce the company’s shares outstanding by more than 14.5%. In addition to being accretive to Seaspan’s earnings per share, since the company would be acquiring shares below its Q3 2011 book value of $17.47, the transaction would also be accretive to book value. Furthermore, recall that in connection with its Q1 2011 results, Seaspan increased its quarterly dividend by 50% to $0.1875 per share. As a result, the stock now provides an annualized yield of 6.1%. In the event the tender offer is fully subscribed, the reduction in shares outstanding would save the company $7.5 million in annual dividend payments.

While this opportunistic tender offer clearly reflects management’s confidence in its business prospects, what’s particularly interesting, in our view, is that management and directors have indicated that they do not intend to tender their shares to the offer. In other words, despite the 43.5% premium that Seaspan is willing to pay to acquire the company’s shares, management and directors continue to believe that at $15.00 per share, the stock would remain undervalued. Given that Seaspan presently trades at a low 9.3x P/E based on 2012 consensus analyst estimates, we strongly concur with management's assessment that the company’s shares are undervalued.  As a result, our ABC Funds – which hold Seaspan shares in all five of our portfolios – have no intention of tendering to the $15.00 offer.

In a separate press release on December 13th, Seaspan announced it had agreed to acquire Seaspan Management Services (SMS) in a stock-based transaction valued at approximately $54 million. This transaction has been approved by an independent committee of directors and is expected to close by the end of January 2012 subject to closing conditions. We believe the acquisition is positive for Seaspan, as it is expected to avoid proposed fee increases that the company pays to SMS, and reduces conflicts of interest between Seaspan and its directors who have an interest in the management company.