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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you, and welcome to Textainer’s First Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be provided at that time. As a reminder, today’s conference call is being recorded.
I will now turn the call over to Ankit Hira Investor Relations for Textainer Group Holdings Limited.
Thank you. Certain statements made during this conference call may contain forward-looking statements in accordance with US securities laws. These statements involve risks and uncertainties, are only predictions and may differ materially from the actual future events or results. The company’s views, estimates, plans and outlook, as described within this call, may change after this discussion. The company is under no obligation to modify or update any or all statements that are made. Please see the company’s Annual Report on Form 20-F for the year ended December 31, 2020 filed with the Securities and Exchange Commission on March 18, 2021 and going forward, any subsequent quarterly filings on Form 6-K for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.
During this call, we will discuss non-GAAP financial measures. As such, measures are not prepared in accordance with Generally Accepted Accounting Principles, a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in today’s earnings press release.
Finally, along with our earnings release today, we’ve also provided slides to accompany our comments on today’s call. Both the earnings release and the earnings call presentation can be found on Textainer’s Investor Relations website at investor.textainer.com.
I would now like to turn the call over to Olivier Ghesquiere, Textainer’s President and Chief Executive Officer, for his opening comments.
Thank you, Ankit. Good afternoon everyone and thank you for joining us today for Textainer’s first quarter 2021 earnings call I’ll begin by reviewing the highlights of our first quarter results and then I’ll provide some perspective on the industry. Michael, will then go over our financial results in greater details, after which, we will open the call to your questions.
We’re extremely pleased with our record first quarter results and revenue growth, which confirms our dramatic turnaround. This has been achieved through organic fleet growth, improved utilization on our base business and optimized financing structure, thanks to the effort of the entire Textainer team over the past two years.
For the quarter our lease rental income was up 7% when adjusted for the fewer number of billing days and 16% higher than for the normal corresponding quarter last year. This represents a substantial increase for a business like ours consisting of more than 85% long-term leases. It also augurs well for continued positive momentum, given the compounded effect of our current fleet growth and the future very long-term leases already secured for containers to be delivered in the coming months.
In addition to revenue growth, we continue to reduce costs and enjoyed strong gains on sales allowing us to report a record adjusted EBITDA which increased 12% to 153 million, as well as a record adjusted net income which increased 44% to $59 million. This adjusted net income represents $1.16 per diluted share and sets us on track to a great full year performance. Similarly we achieved an annualized Q1 ROE of 18%. Container demand has remained elevated since last summer, driven by a prolonged surge in world trades.
In response to high demand, we have invested heavily in organic growth and build up accretive quality revenue. During the second half of 2020 and first quarter of 2021, we added containers totaling $819 million and $580 million respectively.
As the market remains strong, we've placed additional orders for $700 million of containers for delivery through July while focusing on back-to-back leases and longer tenures. This means that substantially all these containers are already on or committed to attractive long-term leases with levered IRR well into the mid-teens and Asia returns.
Furthermore, the average tenure of leases concluded since the beginning of the year has further increased to 12 years. [ph] Virtually guarantee that all these containers will be fully utilized until they reach their depreciated value and can potentially be extended or sold at a profit.
Putting things into perspective for the period of July 2020 through July 2021, we will have invested a total of $2.2 billion in new containers that will provide strong cash flows and attractive revenue for many years to come. This is a significant investment volume representing 45% of our container asset value as of the beginning of this period which will greatly contribute to our future profitability.
At the same time, we continue to support our historically high utilization rate by successfully renewing expiring leases under a long-term arrangement that guarantee most containers will remain on lease until they reach their sales age, further securing our stable future cash flows. While, production of volumes of new containers have increased substantially to meet demand, inventory levels at factories remained very low especially as we approach a traditional peak season of the year. While container prices have remained stable at about 3,500 to 3,600 per CEU since earlier this year.
Our utilization rates averaged 99.6% during the quarter and currently stands at 99.7% on the fleet that breach another important milestone at $4 million TU at the end of April. We continue to experience minimal level of campaign re delivery. And we continue to focus on opportunity to renew and extend expiring leases in a very favorable environment. These leaves renewals have contributed and will continue to contribute to our revenue growth. And more importantly are being structured under long-terms arrangement that guarantee the containers will remain on lease until they reach disposal age.
The extra-long duration of our recent leases both on brand new containers and needs renewal we're locking the cash generated by a significant portion of our fleet to most or all of its remaining economic life. This will provide a strong and stable revenue stream for many years to come. In addition to our strong operating performance we also continue to further strengthen our financial position.
So far this year we have issued two fixed rate ABS, one for $550 million that closed in February and another for $661 million that closed in April. The combined average interest rate of this ABS was very attractive at 2.03%. We also recently announced a successful issuance of 150 million in perpetual preference shares with a cumulative quarterly dividend of 7%. This issuance provides a new and diversified source of funding at an attractive price.
Combined with the leverage potential of our existing debt facility these additional resources will ensure that we can continue to participate in the current exceptional market while optimizing or low blended costs of capital. Finally, we're pleased to announce that we repurchased a total of 446,000 shares of our common stock during the first quarter and that on May 1st our board authorized a $50 million increase to our buyback program.
As we look into the remainder of this year we're optimistic about the momentum of our business and strong market fundamentals. We expect the economy to continue to strongly perform thanks to the government incentive programs and the full reopening of the North American and European economies. We expect container demand to remain elevated through the rest of the year boosted by high trade volumes and restocking of current very low inventories and likely to be further amplified by the traditional peak season of the summer months.
In summary, I'm extremely proud in both the financial and strategic performance of our business. We plan to continue our disciplined approach to our fleet growth investing selectively in the most attractive long term opportunities and remain committed to enhancing our financial performance and delivering long term value to our shareholders.
I will now turn the call over to Michael. We'll give you a little more color about financial results for the first quarter.
Thank you all. Hello everyone. I will now focus on our Q1 financial results. Q1 adjusted net income was $59 million, an increase of $18 million of 44% as compared to Q4. And a record for testing when compared to Q1 of the prior year we have an increase of over 500%. We expect another solid performance in Q2 thereby confirming the strong basis and foundation of our much improved results.
Lastly Q1 adjusted earnings per share was a $1.16 per diluted common share, a 43% increase from the prior quarter. This very strong showing in Q1 translates to an annualized adjusted ROE at 18%. A dramatic improvement from 13% in Q4 we expect to be able to achieve a high-teens area adjusted ROE in Q2 and for the rest of the year.
A valuable indicator of substantial cash flow generation adjust the EBITDA in Q1 was $153 million, an increase of $16 million or 12% as compared to Q4. And also another record for texting, while we are extremely pleased to report record results. It is gratifying to see this level of performance achieved with a strong contribution from the key offering line items from our P&L.
Q1 lease rental income was $168 million, an increase of $8 million for Q4 or $24 million greater than Q1 was the prior year. This is largely due to an increase in fleet size, utilization and average rental rate. We expect our Q2 Lease rental income to show more improvement resulting from continued attractive fleet growth. Gain on sale of owned fleet containers with $12 million, an increase of $5 million as compared to Q4. This is driven by substantial increase in resale container prices partially offset by a reduction in the number containers sold.
We expect you to resale prices to remain strong given continued high demand and the very limited amount of continued re-deliveries and the [indiscernible] resale inventory. Q1 direct container expense is $7 million, a decrease of $4 million as compared to Q4. This is due primarily to lower storage, maintenance and handling costs resulting from high utilization and very low debt stock.
We are pleased with the results of our disciplined efforts to manage and control costs. We expect these costs to remain relatively stable at these attractive levels if not slightly improved in Q2. Q1 depreciation expense is $66 million for the quarter and is expected to increase in Q2 due to continued attractive fleet growth.
Q1 G&A expense of $11 million remain relatively flat as compared to Q4 and is expected to remain at this normalized level going forward. Q1 container let’s see default recovery was positive and included a benefit from the restructuring and recovery of an insolvent customer that had previously defaulted and was written down in the second quarter of 2019.
Q1 interest expense including realized hidden costs were $32 million, an increase of $1 million from Q4. This was primarily driven by higher average shutdowns due to our substantial fleet growth, but largely offset by our lower effective interest rate in Q1. I am pleased with the result of our latest ABS issuance which closed on April 20th and raised $651 million at attractive fixed rate prices and terms.
The proceeds were used to pay off our higher price 2019 Dash one ABS notes and the pay down variable rate bank facilities, which further lowered our effective interest rate and create additional borrowing capacity for future container investment. We continue to be very pleased with the performance of our ABS financing program which provides a flexible and attractive source of long-term fixed rate financing it has valuable charges. Our effective interest rate continue to drop a level of 3% in Q1. We expect this rate to fall below 3% in Q2.
Turning now to our share repurchase program, we purchased 546,000 shares at an average price of $19.68 during Q1. At the end Q1, we had approximately $13 million available under our current plan. In addition to this $13 million, our board authorized an additional $15 million under the program on May 1. We continue to execute our capital allocation plan and we'll repurchase shares opportunistically as we move forward.
Finally as announced on April 14, we successfully completed a public offering on April 30 of $6 million depositary shares each representing an interest in Textainer’s 7% Series A cumulative redeemable perpetual preference shares, for an aggregate public offering price of $150 million. The preference shares represent another source of attractively priced and perpetual capital.
When used in conjunction with pricing, our attractive continue investment opportunities the preference shares contribute by greatly improving equity costs of the company's weighted average cost of capital or WACC. The first quarterly dividend of the preference shares will be paid on June 15 for holders on record as of May 31.
Looking now at our balance sheet and liquidity, we continue to maintain a healthy balance sheet and adequate liquidity through both our well-structured bank facility and cash reserves. We ended Q1 with a cash position inclusive of a strictly cash of $213 million and well optimized financing structure. We continue to remain confident in our ability to support significant accretive organic growth and CapEx while continuing to further improve our profitability metrics.
Consistent with Olivier’s early comments, Textainer is very well positioned to continue to experience strategic plan to further improve financial performance and enhance shareholder value. This concludes our prepared remarks. Thank you all for your time today. Operator, please open the line for questions.
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Michael Brown with KBW. Please proceed with your question.
Thank you, operator. Hi. Good afternoon, Olivier, Michael. How are you doing?
We're good. How are you Michael?
: Doing well, Michael. How are you?
Doing well, thank you. So you know I just – I just wanted to start off with probably the – you know the question I get the most, which is really you know how long can this environment last. And you know I heard in your prepared remarks Olivier that you see this market as being strong for this year. You know I think there is probably a number of elements that could keep it going for longer than that. But you know I wanted to just hear your thoughts as we think about 2022 and the potential for the market to stay you know perhaps not this strong but to stay very attractive for – for a while. And I guess the follow on to that would be you know what causes it to – to end and do you think it'll be somewhat of like a soft landing here that as things normalize eventually.
Thanks, Mike. Listen I think that the first element here to really understand is that it’s a very good question, but because all those leases and all the CapEx that we have committed to is really essentially back to back and leads to customer. The question is somewhat probably less relevant except if you're trying to assess whether the growth is going to continue to accelerate.
But as we've mentioned or I've mentioned in my script quarter-on-quarter we had a 7% revenue growth. And this is really with a business that has a long – a lot of long-term business, 88% of our business is actually long-term leases meaning that you know a container less source like a lot of long-term leasing business is a business with a tremendous inertia and a lot of momentum.
And it means that where we add those containers to the fleet our revenue continues to grow. And we have going to enjoy the full year revenue of the containers we've placed on lease in the end of last year then we are going to enjoy in Q2 the full quarter revenue of those containers that we hired in the first quarter.
And on top of that we are going to get the contribution of those containers that we've already committed and will be delivered in in the second quarter. So I think that that is very important. And what is even more important is that all those containers are committed extremely long maturities.
Actually I think maturities that have never been seen in this industry. Now, how long can this momentum and this additional growth continue. Listen, we, we are actually very optimistic. I mean not only have we moved to a COVID economy where people are really buying a lot of things online. We are now moving to a more open economy where people will continue to buy online but will buy a lot more things that they probably did not buy.
That is further supported by additional government incentives by a lot of people potentially you know finding new activities and new jobs and additional revenue and all of that is going to be boosted by the seasonal demand of the summer months which will coincide with the fact that you know we're at extremely low inventory level. And you know so we're, we’ll have to replenish those inventories. We'll have to get ready for the shopping season of the fall, leading up to Christmas and the end of the year.
So we see absolutely no kind of stop or slowing down in this a very, very strong demand. And that's probably one of the other important element here is that you know this exceptional demand is really fundamentally driven by high, high demand. Right. It's just high demand which causes shift capacity to be fully utilized which causes container capacity to be fully utilized. And it's almost like disruption are bound to happen when you're stretching the system to the limit like it is now. But the disruptions are really not the driver here.
The main driver is really that the growth in trade that is really causing this incredible demand for cargo to be moved from Asia to North America and Europe and to the rest of the world as well. So when does this end? It's a very good question and the timing it’s hard to predict. If we look a little bit closer and it from a container lessors point of view, we probably think that demand for new container will somewhat ease off towards the end of the year and into next year but we are going to have a an extremely soft landing and I think we're going to continue to see sustained demand and the reason we believe we are heading towards a very, very soft landing is because I like to remind people that in 2019 and 2020 we had extremely low production volumes. If anything the shortage compared to the long-term trend would be about 1.5 million to 2 million TEU.
And this year if you look at the projection you know they vary very sort of like between 4.7 million TEU to 5.3 million TEU for the full year that that will just only allow us to catch up on the shortage of production that we have in a two years leading to this incredible market. So what will then happen is that you know yes there will maybe be a slightly smaller demand for new container. But the market will definitely not be oversupplied with container.
And the second element here is that the resale market has been start off supply and when, when demand slows down or comes back to normal shipping lines will start returning some of the older containers that they've been holding on to and those will hit the resale market which, which really has a very, very big appetite for four containers. So we think that you know it's certainly going to be a very soft landing and there's going to be very, very limited impact on the demand for, for leased container. And probably the final element here Mike is that with a new container prices remaining extremely stable at that $3,500, $3,600 per CU. We also expect that this will continue to provide a very strong support for contract that are maturing and that we will have to renew.
Yeah thanks [indiscernible] that was that was great a lot of important, important points in that that you address. Thank you for that. Yeah I guess it is. As I kind of follow on to that question it sounds like you're expecting the adjusted ROE to be in a high teens in 2Q if I heard that correctly. Last quarter if I recall the commentary about maybe I think it was longer term. You think like mid-teens ROE is the right spot you know so, so A, is that that's still how you're thinking about the business through the cycle.
And then B, you know what is in your words is kind of driving the disconnect in the stock and that fundamental outlook because you're basically trading at book value here and you know you're down about 10% in the last month. And you're even at most you were trading at a modest premium to book despite that high return outlook.
So you know I just wanted to hear your take on that dynamic? Thank you.
Yeah just on ROE. I think that we were - we were being awfully careful last quarter but the reality is that the performance of the business is even stronger than we anticipated ourselves and we've essentially changed our view from so like a mid-teen to high teens ROE and we're now going one step further into saying that we certainly expect this to stay at this high teen ROE for the full year and a foreseeable future. On your second question that's the question I ask myself every morning when I wake up Mike. How is it possible that container lessors are trading at multiples that are around 7 times forward earnings when the commentary from ourselves and our peers and everybody can see that the market has got a lot of momentum and that everything is positive.
So not only is that multiple low compared to the rest of the market but you know people kind of can imagine that the earnings are going to go up. So it's a very, very difficult question for me to answer. I think that if it was Textainer, we certainly believe that or share has a lot of value. That's why we continue with our buyback program. And we could only hope that the market would see that the segment is probably a gem in the overall market that is being ignored. Why that is - that is completely puzzling me to be honest Mike.
Yeah that's fair. Thanks for the - thanks for the thoughts there. Okay. Maybe just one last one from me, just looking for a quick update on the capital management philosophy here and in kind of how that's maybe evolved a little bit. You're still actively buying back stock, doing a lot of CapEx which is great to see.
There's obviously some balance sheet optimization action that you guys took in the quarter, I think quite busy there. But as you think about that mix here toggling between investing in the business buying back stock and I think last quarter you had – you had expressed some interest or discussions that you've been having with the board about a dividend, just looking to get an update there and see if any of those things have changed and anything about each of those levers?
No it's essentially pretty much the same Mike I think that we've always stated that as long as we see a continued market momentum and opportunities to put capital at work under favorable leases we would continue that and we will certainly continue to see the market in a very positive light. So our first priority is to continue to deploy CapEx that CapEx and those investments will generate the future cash flow that will eventually allow us to allocate capital back to shareholders.
We continue to see value in our stock price as we just discussed and that's why you know in our stock price as we just discussed and that's why we had the board increase our capital or allocation for buybacks. And in terms of dividend, yeah most definitely Textainer is an ideal business to pay a stable steady dividend. I would like to say that Textainer paid a dividend from the first day it went public and it's only because of a little accident that Textainer had to stop paying a dividend. But the intention is certainly to resume paying a dividend as soon as we see that it's the best capital allocation that is in front of us.
Okay great. Thanks for the time Olivier.
Thank you. Our final question is from Dan Day with B. Riley Securities. Please proceed with your question.
Yeah. Thanks for taking my question. Good afternoon guys. So you grew the fleet by around 5% in the quarter on a TEU basis. Can you just give us any guidance for how we should be thinking about fleet growth in 2Q, 3Q with all those CapEx coming on. So should it be around 5% increase in 2Q similar to the first quarter and then moderate from there or just any commentary you can provide around that would be great?
Yeah, as. Hi, Dan. As we mentioned you know we have a substantial CapEx already committed that will be added to our fleet in the second quarter and that will go on lease fairly fast. And I think that you can expect that the growth in our overall fleet to continue along that the same pattern, probably in Q3 it will be slightly faster than what we have seen in the first quarter. Towards the end of the year I think it’s a little bit less clear at this point in time how much growth there will be.
We estimate that there will still be growth. It might be a little bit slower compared to what we've experienced since July last year. But the other important thing to keep in mind is that containers are now more expensive. So looking at it purely in terms of TU it’s probably not the most accurate measurement. We like to look at it in terms of amount of dollars or CapEx being deployed because ultimately that's what contributions translates into or EPS. But now you could expect that there will be still some some element of growth in the second half of the year. Most definitely.
Great. Thank you. That's helpful. And then just with – on the lease renewals so we've talked in the past you guys had a lot of leases put in place in 15 and 16 well below market value as those are coming up you know in this kind of market. Is it just kind of extended the same rate when in the past you would kind of be taking a discount? Or are you do you have the leverage to sort of increase those leases kind of more to market rates?
Yeah. Dan it's customary to say in our industry that it's very, very difficult to replays or leaders. But I got to say we could not have dreamt of a better market environment for those leases to mature sort of like, sometime you have to be lucky and listen in 2016 we had the perfect storm against as we were forced to renew some of those leases at the, at very cheap rates.
Right now we’re exactly in the opposite situation and certainly you know we're looking to renew those leases and reprice those things as positively. But possibly even more importantly for us and I emphasize that in my, my earlier comments is I think the duration of those lease what we're really looking at is to lock in those cash flow streams for the, for the foreseeable future for the long term. So it's really a combination of you know keeping those assets you know on lease until they reached maturity and also repricing them favorably in this market environment.
Got it. Thank you Olivier. Lesson for me kind of a different question here. Do you have a sense with this business is seems to be changing dramatically compared to what it was just in terms of how long these leases are right. Do you have a sense of or kind of keep track of what your total revenue backlog is or would you be willing to kind of you know maybe disclose that just to kind of or at least talk about where it is relative to the past or provide any detail around that. I just have gotten some questions on that and I think it would be interesting. So whether you have the exact number or not just any commentary around that thought?
What exactly do you mean by revenue backlog. What, what we have kind of committed going forward?
Yeah, so effectively if you if you added up I guess the question comes because you know obviously you're talking 12 year average leases versus kind of five, six year leases in the past we’re more common. So just how much revenue you effectively have contracted on your book versus where that number would have been in the past. I guess just if that you added all the contracts up.
Okay. We do track that. But that answer your question very specifically would have to go back and really compare historically making sure we're comparing apples and apples. But at this point in time we are close to the equivalent of six year revenue that is committed on those leases. Obviously those leases are stretching from higher utilization and then are being spread overtime, but if we add up that revenue that's roughly equivalent to six years’ worth of revenue. I think that – is that one way you wanted to look at it.
Yeah, yeah. No. That's interesting. That's fine. Just I thought it would be an interesting way and you know maybe in the future it's something you think. Yeah. And helpful and kind of people to realize how different this is than was in 2015.
Sure. And another way to look at it and this for the total revenue including our finances lease. Another way to look at it is that the average remaining maturity of our operating leases only used to be around three years. And it's now definitely you know slightly above four years.
Got it. Yeah. I appreciate all the commentary guys. Best of luck, I will turn it over.
Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Olivier Ghesquiere for closing remarks.
Yeah. Thank you everyone for listening in and yeah we look forward to getting together again for our next quarter. Thank you.
This concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation. Have a great day.