Textainer Group Holdings Limited (“Textainer” or “the Company”), one of the world’s largest lessors of intermodal containers, reported financial results for the third quarter ended September 30, 2018.
Key Financial and Business Highlights
- Total revenues of $149.4 million for the quarter, a $23.8 million increase (or 19.0%) from the third quarter of 2017, driven by strong lease-out and resale activity;
- Lease rental income of $129.8 million for the quarter, an increase of $17.6 million (or 15.7%) from the third quarter of 2017 and $8.3 million (or 6.8%) from the second quarter of 2018;
- Adjusted EBITDA(1) of $111.3 million for the quarter, an improvement of $10.7 million (or 10.7%) from the third quarter of 2017 and $2.2 million (or 2.0%) from the second quarter of 2018;
- Recorded container impairments totaling $16.8 million resulting mostly from two defaulted lessees and additionally the move to disposal of economically unleasable containers. The two defaulted lessees also caused additional container recovery costs of $2.5 million recorded in Direct container expense;
- Net income of $1.9 million for the quarter, or $0.03 per diluted common share, a decrease of $16.6 million from the third quarter of 2017 and $15.6 million from the second quarter of 2018;
- Adjusted net income(1) of $4.8 million for the quarter, or $0.08 per diluted common share, a decrease of $13.8 million from the third quarter of 2017 and $12.9 million from the second quarter of 2018. Excluding the impact of impairment and recovery costs for the two defaulted lessees, as well as the write-down of the economically unleasable containers described above, adjusted net income for the quarter would have totaled $22.1 million, or $0.39 per diluted common share;
- Utilization averaged 98.0% for the quarter and is currently at 98.6%, an improvement of 130 basis points from the average in the third quarter of 2017;
- Continued growth with container investments of $820 million delivered year-to-date, including over $290 million of new production received during the third quarter; and
- Effective September 26, 2018, we amended our revolving credit facility to increase its size to $1.5 billion, lower its pricing by 50 basis points, and extend the term to five years.
“Our third quarter performance reflects the continued positive results of our fleet growth and high utilization rate. Lease rental income increased $8.3 million from the previous quarter, marking the eighth-consecutive quarter of lease rental income growth. The average yield of our fleet continued to improve as we locked-in more long-term leases at rates higher than our current fleet average,” stated Olivier Ghesquiere, President and Chief Executive Officer of Textainer Group Holdings Limited.
“However, our net income was negatively affected by impairment charges and recovery costs for two defaulting regional shipping lines in Asia. We have now recovered the majority of containers worth recovering and believe the impact of these defaults are mostly behind us. In addition, we decided to dispose of economically unleasable containers which resulted in an impairment write-down during the quarter. Their disposal will help save on storage cost while taking advantage of the current positive resale market to monetize their remaining value.
“We saw strong demand ahead of the Golden Week with 165,000 TEU picked up during the quarter, which included 137,000 TEU of new production. These new containers went on operating leases with an average minimum contractual term in excess of six years and favorable return schedules. Drop-off activity was limited, resulting in a quarterly lease-out to turn-in ratio of 2.5 to 1. Given the strong demand environment, industry-wide factory inventory was further reduced to 600,000 TEU.”
Key Financial Information (in thousands except for per share and TEU amounts):
| QTD | YTD | |||||||||||||||
| Q3 2018 | Q3 2017 | Q3 2018 | Q3 2017 | |||||||||||||
| Lease rental income | $ | 129,834 | $ | 112,195 | $ | 371,639 | $ | 328,591 | ||||||||
| Total revenues | $ | 149,438 | $ | 125,600 | $ | 423,378 | $ | 361,534 | ||||||||
| Income from operations | $ | 37,156 | $ | 45,005 | $ | 138,092 | $ | 98,556 | ||||||||
|
Net income attributable to Textainer Group Holdings Limited common shareholders |
$ | 1,913 | $ | 18,481 | $ | 38,137 | $ | 2,154 | ||||||||
|
Net income attributable to Textainer Group Holdings Limited common shareholders per diluted common share |
$ | 0.03 | $ | 0.32 | $ | 0.66 | $ | 0.04 | ||||||||
| Adjusted net income (1) | $ | 4,815 | $ | 18,635 | $ | 39,554 | $ | 8,373 | ||||||||
| Adjusted net income per diluted common share (1) | $ | 0.08 | $ | 0.33 | $ | 0.69 | $ | 0.15 | ||||||||
| Adjusted EBITDA (1) | $ | 111,329 | $ | 100,606 | $ | 325,722 | $ | 273,928 | ||||||||
| Average fleet utilization | 98.0 | % | 96.7 | % | 97.9 | % | 96.0 | % | ||||||||
| Total fleet size at end of period (TEU) | 3,451,293 | 3,202,140 | ||||||||||||||
| Owned percentage of total fleet at end of period | 80.9 | % | 77.2 | % | ||||||||||||
(1) “Adjusted net income” and “adjusted EBITDA” are Non-GAAP Measures that are reconciled to GAAP measures in section “Reconciliation of GAAP financial measures to non-GAAP financial measures” below. “Adjusted net income” is defined as net income attributable to Textainer Group Holdings Limited common shareholders before charges to write-off of unamortized deferred debt issuance costs and bond discounts, unrealized gains on interest rate swaps, collars and caps, net, costs associated with departing senior executives and the related impact of reconciling items on income tax expense and net income attributable to the non-controlling interests (“NCI”). “Adjusted EBITDA” is defined as net income attributable to Textainer Group Holdings Limited common shareholders before interest income and expense, write-off of unamortized deferred debt issuance costs and bond discounts, realized (gains) losses on interest rate swaps, collars and caps, net, unrealized gains on interest rate swaps, collars and caps, net, costs associated with departing senior executives, income tax expense, net income attributable to the NCI, depreciation expense, container impairment, amortization expense and the related impact of reconciling items on net income attributable to the NCI. Section “Reconciliation of GAAP financial measures to non-GAAP financial measures” provides certain qualifications and limitations on the use of Non-GAAP Measures.
Third-Quarter Results
Lease rental income increased $17.6 million from the third quarter of 2017 and $8.3 million from the second quarter of 2018. These increases were due to higher utilization, larger fleet size and increases in the average rental rates of the fleet.
Direct container expense increased $5.5 million, compared to the third quarter of 2017, mostly due to $2.5 million in container recovery cost incurred for two lessees that became insolvent in 2018 and higher repositioning expense, partially offset by lower storage costs.
Container impairment was $16.8 million for the quarter, consisting primarily of a $8.1 million write-off for the estimated unrecoverable containers held by two defaulted lessees and $6.9 million in impairments to write down the value of unleasable containers moved to disposal. These unleasable containers are primarily reefer units, many of them recovered from Hanjin, for which there are no near-term lease opportunities due to various technical and commercial factors.
Depreciation expense increased $5.1 million from the third quarter of 2017 and $2.7 million from the second quarter of 2018, primarily due to fleet growth.
In line with Textainer’s policy of assessing residual values of its containers, company increased the estimated future residual value of our 40’high cube dry containers from $1,350 to $1,400 and decreased the estimated future residual value of its 40’ high cube refrigerated containers from $4,500 to $4,000, effective July 1, 2018. These changes decreased depreciation expense by $0.1 million during this current quarter and are not expected to have a significant impact in upcoming quarters. The revised residual values better reflect company’s long-term view of used container prices for these container types.
Long-term incentive compensation expense was $3.2 million for the quarter and includes expenses of $1.9 million associated with the acceleration of stock compensation from departing senior executive personnel.
Interest expense increased $5.6 million, compared to the third quarter of 2017, mostly due to higher borrowing costs resulting from a higher ratio of fixed rate debt, a higher average debt balance, and higher interest rates. Realized gains on interest rate swaps, collars and caps, net, increased $1.1 million, compared to the third quarter 2017 due to the increase in interest rates.
Outlook
“Following the very strong lease out activity of the third quarter, we now expect to see restrained demand until the traditional year-end ramp-up leading into Lunar New Year. Given strong competition by manufacturers and a depreciating renminbi, new container prices have recently decreased to about $1,900 per CEU. Other indicators remain positive, including low depot inventory, low turn-in bookings, and stable resale prices supported by the limited supply of containers available for sale,” continued Mr. Ghesquiere.
“Looking ahead at 2019, the IMF recently revised their 2019 global growth forecast slightly from 3.9% to 3.7% on concerns of unresolved trade disputes. We continue to monitor these developments closely but have not yet seen any material negative impact on container demand.
“We are concentrating on optimizing the profitability of the Company with a particular focus on our yields and transaction terms. In this respect, we intend to continue to strengthen our business operations and financing capacity to meet our customer needs and position ourselves to seize profitable market opportunities as they may arise,” concluded Mr. Ghesquiere.
