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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello and welcome to Textainer's Fourth Quarter and Full Year 2020 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. Ankit please go ahead.
Thank you. Certain statements made during this conference call may contain forward-looking statements in accordance with US securities laws. These statements that involve risks and uncertainties are only predictions and may differ materially from 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 31st, 2019 filed with the Securities and Exchange Commission on March 30 2020 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 have 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 fourth quarter 2020 earnings call. I'll begin by reviewing the highlights of our fourth quarter and full year 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 excited about the significant improvement in our financial performance and the continued very favorable market conditions. Our fourth quarter performance underscores the renewed strength of our business and provides sustainable momentum into the New Year. For the quarter, lease rental income increased 8% to $161 million and adjusted EBITDA increased 15% to $137 million.
Our adjusted net income nearly doubled to $41 million or $0.81 per diluted common shares as compared to $22 million or $0.41 per diluted common share in the previous quarter. This adjusted net income represents an annualized ROE of 13% which probably best summarizes the magnitude of our performance improvements.
I am particularly proud of our team's resilience and disciplined execution against our long-term strategic plan that ensured our preparedness and ability to swiftly respond to the tremendous and sudden increase in container demand.
By acting fast at the beginning of the cycle, we secured container at an attractive price and were able to capture profitable new business and grow our market share at a critical point of the market cycle.
In the fourth quarter, we leased out 300,000 CEU of factory and depot containers and extended over 280,000 CEU of maturing long-term leases under favorable terms bringing the average utilization rate for the quarter to 98.5% and 99.5% as of today. These leases will secure a stable and profitable revenue stream over the long term. The average lease tenor of our factory lease-outs was in excess of 10 years, with returns scheduled almost exclusively in Asia. Most of the lease renewal and depot lease-outs were structured as life cycle leases with maturities extending through the remaining useful life of the containers.
Our fourth quarter CapEx totaled $470 million and our fleet reached a significant milestone surpassing four million CEU by the end of the year. In total, CapEx for the full year exceeded $1 billion, with most delivery backloaded into the second half of the year. Given the continued demand, we have also set additional orders totaling $925 million for delivery during the first half of 2021.
Essentially, all these units are already pre-committed to attractive leases with levered IRR well into the mid-teens, long tenors and Asia returns. Although manufacturers have increased production to meet market demand, additional capacity has been added very progressively and has also been further constrained by shortages of certain components.
As a result, new container prices and lead times have steadily increased over the past few months. The quoted price for an order placed today is over $3,500 per CEU or $1,000 more than for order placed back as recently as November. While the average price for our upcoming 2021 orders is well below this current level, container investments remain attractive as lease rates and maturities have increased in tandem with container prices thereby eliminating and considerably litigating re-pricing risk.
Our customers continue to benefit from high-cargo volumes and record freight rates. This has resulted in improved profitability that has allowed carriers to shore up their balance sheet and improve their credit spending. Carriers have so far mostly prioritized deleveraging over new investment and expansion. While some element of uncertainty from COVID remains, we're very optimistic about our improved performance and strong market fundamentals.
We expect cargo volumes to remain elevated in the near term, boosted by government incentive plans e-commerce and the continued spending shift from services to consumer goods. These elevated volumes along with port congestion should continue to support container demand.
We expect container prices to remain high as container manufacturers are in a strong position to protect current elevated price, while production capacity is virtually sold out for the first half of the year. We expect much reduced credit risk as carriers continue to benefit from the current market favorable condition.
And finally, we believe that carriers will continue to lease a significant portion of their container fleet, as they focus their liquidity on deleveraging, improving vessel efficiency and developing value-added service offerings such as integrated logistics.
In summary, we remain focused on driving shareholder value creation for the long term and we believe that we have turned an important corner in improving business profitability and setting it on a steady path to continued earnings and returns enhancement for the eventual recommencement of a dividend program.
We will continue to execute against our long-term plan to further improve our business to be best-in-class as we take advantage of the current favorable market condition to grow organically and improve profitability and returns, thanks to further optimized financing, disciplined CapEx, continued cost control, renewed IT system and continued optimization of our capital structure.
I will now turn the call over to Michael, who will give you a little more color about our financial results for the fourth quarter and full year.
Thank you, Olivier. I will now focus on the key drivers of our financial results. Q4 adjusted net income was $41 million, almost doubled from the prior quarter and our highest level in the last six years. We are very pleased that this results in an annualized adjusted ROE of 13%. For the year, adjusted net income was $87 million, a 58% increase as compared to 2019.
Q4 adjusted EPS was $0.81 per diluted common share also almost doubled from the prior quarter. For the year, adjusted EPS was $1.63 per diluted common share, a 70% increase as compared to 2019.
Q4 adjusted EBITDA was $137 million, an increase of $18 million as compared to Q3 showing continued and improving strong cash generation from our business. For the year, adjusted EBITDA was $476 million, an increase of $12 million as compared to the prior year.
Q4 lease rental income was $161 million, an increase of $12 million from Q3. This was largely due to an increase in fleet size, utilization and average rental rates. We are very pleased with the increase in our utilization rate, which currently stands at 99.5%. We expect our Q1 lease rental income to show continued improvement.
Q4 gain on sale of owned fleet containers net was $8 million relatively consistent as compared to Q3. Substantial increases in the average gain per container sold were offset by a reduction in the number of containers sold given limited for-sale inventory as a result of high utilization.
Resale of container prices have increased significantly benefiting from increased demand, reduced available inventory and increases in new container prices. While we expect a continued strong resale price environment, resale volumes are expected to remain low in Q1 given the minimal available for-sale inventory.
Q4 container direct expense for the owned fleet was $10 million, a decrease of $6 million as compared to Q3. This was due primarily to lower storage costs resulting from higher utilization and lower maintenance and handling expense resulting from very limited remaining debt inventory. We are pleased with the results of our continued focus on cost control efforts to normalize these expenses and expect further improvements in Q1.
Q4 depreciation expense was $66 million for the quarter and is expected to increase in Q1 due to continued fleet growth. Q4 G&A expense of $11 million remained flat, as compared to Q3 and is expected to remain at this level going forward. We continue to improve the quality of our spending and G&A expense through among other methods enhancement of our technology tools and staff talent.
Q4 interest expense, including realized hedging costs was $31 million, a decrease of $2 million from Q3. This was primarily driven by lower interest rates from our successful refinancing activity during Q3, partially offset by a higher average debt balance due to the funding of attractive CapEx opportunities.
I'm pleased to announce our latest ABS issuance, which closed on February 10 and raised $550 million at attractive fixed rate pricing and terms. The proceeds from this issuance will be used to pay down our bank facilities to create additional borrowing capacity for future CapEx.
We are very pleased with the performance of our ABS financing program, which provides a flexible and attractive source of long-term fixed rate financing that is valuable to our business. We expect our average effective interest rate to remain relatively consistent at 3.1% during Q1.
Turning now to our share repurchase program. We repurchased 779,000 shares and 6.7 million shares of Textainer common stock in the open market at an average price of $15 and $10.13 per share during Q4 and full year 2020, respectively. During 2020, we repurchased over 12% of our outstanding shares. As of the end of the year, we had $23 million remaining and available from our borrowed authorized program for repurchases, which continues as we move forward.
Finally as announced on January 20, 2021, we recently acquired a 49.9% minority interest in TAP Funding, a joint venture that has been included within our consolidated results. Following the acquisition, Textainer will wholly-own all consolidated areas and will no longer report non-controlling interest. This acquisition will be really accretive to earnings and further streamlines our organizational structure.
Looking now at our balance sheet and liquidity, we remain focused on maintaining a healthy balance sheet and adequate liquidity through both our well-structured bank facilities and cash reserves. We ended Q4 with a cash position inclusive of restricted cash of $205 million. We remain confident in our continued ability to support significant accretive organic growth through CapEx, while continuing to improve our profitability metrics.
Consistent with Olivier's earlier comments, Textainer is very well-positioned as it enters 2021 with the capital allocation strategy well-supported by available liquidity and optimized capital structure and demonstrated expense control and efficiency.
This concludes our prepared remarks. Thank you all for your time today. Operator, please open the line for questions.
Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Michael Brown from KBW. Your line is now live.
Okay, great. Hi, Olivier. Hi, Michael. How are you guys?
Good. How are you Michael?
Great, great. So the biggest question that I get from investors today is really how long can this market dynamics last. And so Olivier I noticed in your prepared remarks, you talked a lot about some of the elements here that seem to, kind of, keep -- that could support the demand due to some incentive plans and shifting towards consumer good consumption. And then also you talked about some of the port congestion and relatively rational dynamics on the supply side, but you mentioned near-term.
And so as I'm trying to think about how this could play out into the back half of 2021, what are kind of the puts and takes here that would ultimately cause this dynamic to reverse or revert back to something more normal? I understand it's certainly different than prior periods, but just interested to hear your thoughts here.
No. I mean, listen first of all, it's I think very obvious that whatever comes up has to come down at some point in time. The current market is exceptional in several aspects. I mean, it's exceptional because it's allowed us to put a lot of capital at work and it's exceptional because we've secured fantastic yields, but also very long lease durations so as to protect ourselves against a possible downturn. As we mentioned earlier, the average maturity of the containers we've placed on lease and those that are committed for the first half of this year have an average maturity of -- in excess of 10 years. So that should give us some element of protection.
But coming back to your fundamental question about what really drives demand, I always like to, kind of, go back a little bit and remind the audience that 2019 was actually a very slow year for container demand. If you remember, it was the time of trade wars and shipping lines who were really trying to optimize their inventories. And essentially they were returning a lot of containers. And certainly the production level was very low.
Now that really essentially continued for the first half of 2020 due to the initial scare of COVID so production was really, really low. And it's only really in July that we have seen production starting to ramp-up and it's actually today at a fairly high level. This being said, the market is definitely not oversupplied in -- with containers. And our view is very much that as the market will normalize most likely when we move out of the COVID economy, which I think is going to take a certain time.
But as we progressively move out of the COVID economy towards the end of the year, we're going to see a normalization of trade in container. But we are not going to see a situation where there's an excess of container in the market. First of all, as I mentioned we have our leases secured for the longer term. But secondly, I really don't see that there will be an excess of container simply because the market was in short supply before this cycle really started.
Okay. Great. That's really helpful color, Olivier. I guess, when I think about the second half of 2020 that was really just a step function change in the operating environment and Textainer has been a major beneficiary. You can clearly see in the fourth quarter results here.
You put up a 13% annualized ROE in the fourth quarter so I'm trying to think about now what's kind of the -- how this structural change has really impacted your fundamental outlook here. And so how do you guys think about what your ROE potential is now? Is 13% something in the low teens seem to be where you think Textainer can perform consistently now? Obviously credit put that aside, we don't know exactly how that probably head at some point. But is it something in the low teens or mid-teens? How do you think we should forecast out ROEs from here?
No. I think the big message that I would like to put forward here is that, Textainer is back. I think we've had certainly an exciting journey since the previous down cycle and the Hanjin bankruptcy, but we're now really seeing the fruit of our hard work over the recent two years. And the numbers really speak for themselves. I mean the -- I won't go through them again, but the revenue is up.
You can see we have CapEx locked in. That's going to contribute to further revenue. The profit has almost doubled and it's only going to continue to improve with all the containers that we are activating. So we really have a very positive momentum. On your question on the ROE, we've also really been focused on making sure that any CapEx we deploy and any additional container we put in service is incremental to our net income, but also incremental to ROE.
So we see the ROE and we certainly target the ROE to continue to improve. We were very pleased with the results of 13%. I think it's fair to say that we're probably targeting a further improvement on that. I don't want to be too specific, but 15% certainly seems quite reasonable. And that's really on the base of the organic cash flow that our assets can generate before we act possibly on our capital structure by reducing our equity.
Okay. Great. And maybe just one follow-up on that for me and I'll leave it. But you put a lot of CapEx on the fourth quarter. I'm assuming that's going to be a good run rate into the first quarter. So is it fair to assume that you certainly have a headcount or -- sorry day count headwind in the first quarter. But is it fair to assume that you can overcome that and that leasing rental income could be up in the first quarter? Just trying to make sure that kind of the right jumping-off line for the modeling.
Yes. I personally can't see how the revenue could not be up in the first and second quarter of the year. We have all those containers going on lease and those that went on lease. I think where we really caught the market was really in the third quarter where we were extremely fast and we managed to buy container and put them on lease very, very quickly. It was really down to speed of execution.
But thereafter all the containers that go into working service are only generating partly their full revenue each quarter they go on lease. So all the revenue that have gone on lease in the fourth quarter have only generated revenue for possibly half of the quarter. They're going to generate revenue for the full quarter. Then in the first quarter, we are going to have the further CapEx. And we also have $925 million of CapEx committed to be delivered in the first and second quarter that will start generating revenue progressively. So resolute yet weak and you can expect to see our revenue continue to improve.
Okay. Great.
Yes. Michael one thing to add there, if you just look at the utilization rate as well so the average for the fourth quarter was 98.5%. Where we are right now in Q1 is 99.5%. So that's going to figure into the average for the first quarter, so you could see and then have the benefit from that as well.
Okay. Great. Thank you for that clarification. And thank you for taking my questions.
Thank you, Michael.
Thank you. Our next question today is coming from Dan Day from B. Riley Securities. Your line is now live.
Yes. Afternoon, everybody. Thanks for taking my questions. And congrats on a really great quarter and a really great outlook. It's awesome to see. First quick question here. You guys grew the fleet pretty aggressively 4% to 5% in the last couple of quarters. Is that a good run rate to think of like for fleet growth in first and second quarter going forward? Or if we should kind of be anchored to that 4%, 5% and then maybe moderating from there?
I think it's a pretty aggressive growth rate. It's certainly above our long-term CapEx renewal plan. But certainly what we have seen in the last half of 2020, we see being reproduced in the first half of 2021. And as a matter of fact, those leases are actually already 95% committed. So we don't expect a slowdown in the short-term. We certainly expect growth to continue over Q1 and Q2.
Okay. Thank you. And just on the lease repricing, you guys had a lot more leases coming up than a lot of your competitors. Are those starting to reprice into the market? And are they benefiting from these strong rates?
Yes absolutely. What is not shown on that chart that is on investor presentation on slide 8, which does show the number of containers maturing this year is all those that have been renewed that were actually maturing last year. And definitely, a lot of those leases have been extended under a favorable term given the general environment.
And we really see those leases expiring in 2021 as a great opportunity because those are comprising of many legacy leases from the last down cycle that are at very cheap rates and we could not have imagined a better market environment to have those lease maturing, so that we can extend them and potentially reprice them very positively.
Yes. So safe to think that like obviously the 99%-plus utilization rate is going to moderate over the course of this year and next year, but maybe some of that even gets offset by increasing per diem rates as you get that lease repricing upside? Is that a good way to think about it longer term?
Absolutely, correct.
Great, great. And then just last one. The share repurchase authorization is kind of running down here. Any plans to re-up that? And then you mentioned the dividend looking at eventual reinstatement. Any thoughts on the time line for that? I understand CapEx is kind of the priority here in the near term. So, just with that in mind any thoughts there?
Yeah. No, listen, capital allocation is always on top of our priorities. We always have that in mind. That's how we built our long-term strategic plan. As you mentioned, right now, we benefit from a great market, so deploying CapEx has made a lot of sense, and you can see the impact of that in the results for this quarter. And as I mentioned, it's going to continue improving. The buyback, similarly, I think we did pretty well last year. We bought about 12% of our shares back at an average rate of $10 a share, which I think is very attractive. That certainly helped improve the EPS.
And in terms of dividend, really what I would like to say is, listen, Textainer has always been a strong dividend payer. We've been a dividend payer the first day we listed the company. The business model is really an appropriate model to ensure stable steady dividends given the strong cash flow that it does generate. And we fully intend to resume paying a dividend, which we see as the logical accomplishment of our strategic plan.
And yeah, I think we are assessing that situation on a very, very regular basis. And yeah, I can assure you that the Board, who has to make this kind of long-term decision, because obviously when we resume a dividend, we want to make sure that it is a stable and long-term yield that we can provide, is reviewing this question on a very, very regular basis.
Awesome. Well, congrats again on a job well done this quarter, and excited to see what's in store for 2021. So I’ll turn it over.
Thank you. Thank you, Dan.
Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to Olivier for any further or closing comments.
Yes. And yes, thank you everybody for listening in, and looking forward to discuss our next quarter, and wishing you a great year. Thank you very much.
Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.