Triton International Limited (NYSE:TRTN) Q4 2022 Earnings Conference Call February 14, 2023 8:30 AM ET
Company Participants
Brian Sondey – Chairman, Chief Executive Officer
Michael Pearl – Chief Financial Officer
John O’Callaghan – Global Head of Marketing and Operations
Conference Call Participants
Larry Solow – CJS Securities
Michael Brown – KBW
Adam Roszkowski – Bank of America
Liam Burke – B. Riley
Operator
Good morning and welcome to the Triton International Limited fourth quarter 2022 earnings conference call.
All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded.
I would now like to turn the conference over to Michael Pearl, CFO. Please go ahead.
Michael Pearl
Thank you Anthony. Good morning and thank you for joining us on today’s call. We are here to discuss Triton’s fourth quarter and full year 2022 results, which were reported this morning. Joining me on today’s call from Triton is Brian Sondey, our CEO, and John O’Callaghan, our Head of Global Marketing and Operations.
Before I turn the call over to Brian, I would like to note that our prepared remarks will follow along with the presentation that can be found in the Investors section of our website under Investor Presentations. I’d like to direct you to Slide 2 of that presentation and remind you that today’s presentation includes forward-looking statements that reflect Triton’s current view with respect to future events, financial performance and industry conditions. These forward-looking statements are subject to various risks and uncertainties. Triton has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation, and we encourage you to review these factors.
In addition, reconciliations of non-GAAP measures to the most directly comparable GAAP financial measure are included in our earnings release and the presentation.
I will now turn the call over to Brian.
Brian Sondey
Thanks Michael. Welcome to Triton International’s fourth quarter and full year 2022 earnings conference call.
Before I start with our formal presentation, I would like to congratulate Michael on his promotion to Chief Financial Officer and welcome him to our quarterly calls. Congratulations, Michael.
I’ll now start with Slide 3 of our presentation. Triton’s strong results in the fourth quarter capped an outstanding year for the company. In the fourth quarter, we generated $2.76 of adjusted net income per share and achieved an annualized return on equity of 25.4%. For the full year 2022, we generated $11.32 of adjusted earnings per share and achieved a return on equity of 28.4%. Our 2022 adjusted earnings per share were up more than 20% from 2021, which had been a record year for Triton.
While market environments slowed in 2022 following nearly two years of exceptional container demand, trade volumes have retreated from the 2021 surge. Consumers are shifting spending back from goods to services and the various headwinds facing the global economy are hitting trades as well. In addition, the logistical bottlenecks that impacted pandemic-era supply chains have eased, speeding container turn times and freeing container capacity. As a result, most of our customers are off-hiring containers and our utilization is gradually decreasing from last year’s record level. We expect our performance will remain strong despite the challenging environment.
We have significant operational and financial advantages in our market. The large number of containers we purchased over the last few years are locked away on long duration, high IRR leases. We have strengthened our overall lease portfolio. The vast majority of our containers are on multi-year long term leases. We have significantly increased the average remaining duration of our leases and almost 60% of our containers are on life cycle leases, which are structured to keep containers on hire until the end of their leasing lives. We have also locked in low cost financing with long term fixed rate debt.
We continue to use our strong cash flow to drive shareholder value. We shifted our investment focus from fleet growth in 2021 to share repurchases in 2022. We purchased over 9.1 million shares in 2022, representing nearly 14% of our outstanding shares at the beginning of the year while also decreasing our leverage.
Market conditions are currently challenging, but we expect our financial performance will remain strong. We expect our adjusted earnings per share will decrease from the fourth to the first quarter as negative seasonality adds pressure to the generally soft market conditions. In addition, we do not expect the recurring–excuse me, the non-recurring items which benefited the fourth quarter will recur, but we expect our utilization will remain high and expect our share repurchases will remain highly accretive. Overall, we expect our cash flow, profitability and return on equity will remain strong throughout 2023 and into the longer term.
I’ll now hand the call over to John O’Callaghan, our Global Head of Marketing and Operations.
John O’Callaghan
Thank you Brian. Page 4 shows Triton operating metrics.
In the lower left chart, you can see the monthly trend of our pick-up and drop-off activity. Pick-up volumes decelerated in the first half of 2022, while drop-offs remained low as shipping lines contended with the lingering effects of port congestion and other supply chain bottlenecks. We started to see drop-offs accelerate in the third quarter as our customers reacted to a muted peak season and an easing of logistical bottlenecks. This continued through the fourth quarter as the lines started to rebalance their fleets in response to declining trade volumes.
The result of this increase in drop-off volumes is a gradual reduction in our utilization rate, as shown in the upper left chart. Nevertheless, utilization remains high at 97.6%, reflecting the durable protection provided by our long term and finance leases which now make up over 88% of our lease portfolio as weighted by net book value.
A key part of our enhanced lease protection has been the increase in the percentage of our containers on life cycle lease, as shown on the upper right. In the chart, you can see that nearly 60% of our containers are on life cycle leases, which are structured to keep containers on hire through their full remaining leasing life and so have very little utilization risk.
The bottom chart on the lower right shows the volume of our new dry container transaction activity. The volume of new container leases has significantly decreased as a result of the market environment changes and our clients’ increased emphasis on operational effectiveness.
Page 5 illustrates the shipping market is normalizing following two years of exceptional conditions. In the upper left chart, you can see the spot freight rates for our customers have decreased steeply over the last few quarters in response to cooling trade activity and have returned to pre-pandemic levels on most trade lanes. In the upper right, you can see that new container prices have also normalized as container capacity is no longer in shortage and demand for new containers has eased. The chart in the lower right looks at an index of used container sales prices. Used prices have come down in concert with new container prices, although we continued to generate solid disposal gains in the fourth quarter. Finally in the lower left, you can see that port congestion has mostly dissipated as reduced trade volumes and improved productivity have allowed ports to work through their vessel backlogs.
Page 6 looks at the supply of new and used containers, as well as new container production volumes which have decreased in response to slower demand. The chart at the upper left shows the inventory of new containers awaiting deployment. After reaching historically low levels in 2021, factory inventory is now back around the long term average as a percent of the total dry container fleet. You can see in the lower left that Triton’s depot inventory of used containers has grown, reflecting the increased pace of off-hires.
Relative to our fleet size, our depot inventory remains very low and we expect it to remain well under control due to the durable enhancements we have made to our lease portfolio. Importantly, the vast majority of our depot stocks are located in key demand locations in Asia and we expect the containers to go on hire quickly as the market enters the next up cycle.
2022 production orders, as shown by the graphs on the right, dropped by more than 50% year-over-year in response to our customers’ shift in aggressively adding containers in 2021 back to fleet efficiency. As you can see on the lower right chart, production volumes dropped way below the replacement range as demand increased through the fourth quarter of 2022. The market has a natural balance of new container production and we expect very limited production of new containers in the first half of 2023.
We have talked in the past about the short order cycle for containers, which is just a few months, and the natural order of how container production as well as the overall container fleet adjusts quickly to changes in the global container supply and demand balance.
I’ll now hand you over to Michael Pearl, our CFO.
Michael Pearl
Thank you John. On Slide 7, we have presented our consolidated financial results.
Adjusted net income for the fourth quarter was $160.7 million or $2.76 per share, a decrease of 4.2% from the third quarter. For the full year of 2022, adjusted net income was $702.8 million or $11.32 per share, an increase of 23.6% from 2021. This outstanding performance represents another record year of earnings that is built upon our impressive results from last year. In addition, we achieved an annualized return on equity of 25.4% in the fourth quarter and a return on equity of 28.4% for the full year.
On Slide 8, I will discuss the key drivers of our performance focusing on sequential changes from the third to the fourth quarter. Limited capex led to a 1.7% decrease in our average revenue earning assets in the fourth quarter. Average utilization for the quarter was down 70 basis points due to more challenging market conditions but still remains very high and is supported by our well structured, long duration leases.
Driven in part by an increase in storage costs, we saw operating expense increase by $7.7 million in the quarter. This increase was partially offset by an increase in revenue for repairs and handling costs that are re-billed to our customers.
Interest expense increased slightly in the quarter as higher rates somewhat offset the decrease in our average debt balance; however, our effective interest rate remained low as we continued to benefit from the high portion of our debt that is fixed at attractive levels. At year end, 88% of our debt was either fixed or swapped to fixed. Gain on sale and trading margin decreased 11% in the fourth quarter but still remains at a high level, and we continue to see pricing well above our residual values.
The fourth quarter included several unusual items that added $0.13 per share to our earnings. We recorded a $3 million benefit from the reversal of a credit charge taken earlier this year and the recovery from a default that occurred several years ago. We also had $4.8 million of gains from lease buyout transactions that benefited gain on sale. We do not expect these items to recur in the first quarter.
As Brian mentioned earlier, we continue to use our strong cash flow to actively buy back shares, resulting in a continued decrease in our share count.
Slide demonstrates the meaningful increase in our leasing margin over the last several years and the durable enhancements we have made to help support this high level of profitability into the future. The chart on the left of the page shows this increase in leasing margin, which is being driven by several factors including our elevated level of investment in high returning leases, attractive transactions for existing depot units, exceptional levels of utilization, and the impact from our significant refinancing activity. We have created a new level of durable profitability, and the chart on the right of the page shows what we have done to help lock in this high level of leasing margin.
The chart on the upper right shows the evolution of our leasing portfolio. A combination of new long duration leases along with attractive terms on renewals and depot pick-ups have enabled us to extend our average lease duration to almost 80 months, and as of the end of the year, 88% of our units by book value were either on long term or finance leases.
The chart on the lower right illustrates the improvements we have made to our debt structure. We have locked in long duration financing at low levels that will help keep the effective interest rate on our current fleet from meaningfully increasing over the next several years.
I will now turn the call over to Brian.
Brian Sondey
Thanks Michael.
Slide 10 summarizes the cash flow power of our business. In 2022, we generate slightly over $1.6 billion of cash flow. We need to allocate a little more than half of this cash flow for replacement capital spending in order to maintain our fleet size as containers age out of service. This leaves us with a little over $700 million of steady state cash flow. We use roughly $160 million per year for our regular dividend. As a result, we have about $545 million of steady state cash flow after our substantial regular dividend.
The next set of numbers shows a few things that we can do with this $545 million and illustrates why we’re able to create value across a wide range of market environments. If we focus on capital investment like we did in 2021, we can self-fund the equity needed for nearly 20% asset growth while keeping our leverage ratio constant. Alternatively, if we focus on share repurchases like we are now, we can repurchase about 13% of our shares at the current trading range. If we wanted instead to focus on dividends, we could pay well over $9 per share on top of our regular dividend, bringing the total annual dividend into the range of $12 per share. We have also included a table at the bottom of the slide that shows how we’re able to use our strong cash flow to drive per-share fleet growth almost regardless of market conditions, again while holding our leverage ratio steady.
Revenue earning assets per share have increased from $134 per share at the end of 2020 to $199 per share at the end of 2022, an increase of almost 50% across two very different market environments. This strong growth in our assets per share is another key reason we expect our higher level of financial performance will be durable.
Slide 11 looks at how Triton has created long term value. Triton is the scale, cost and capability leader in a fundamentally attractive market, and we have a long history of delivering solid growth, strong profitability, and above-market shareholder returns. The chart on the upper left looks at the long term growth of our container fleet. We have grown the net book value of our fleet 8% annually over the last 17 years. The chart on the upper right looks at our long term cash flow before capital spending. You can see how our cash flow has increased as we have grown our fleet, and you can see the stability of our cash flow even in very challenging years for the global economy. The chart on the lower left shows how we’ve used our cash flow to both reinvest in our business and regularly return cash to shareholders.
At the time of TIL’s IPO in 2005, TIL had an adjusted net book value of around $12 per share. Our adjusted net book value has increased steadily recently at an accelerated pace and is now almost $50 per share. We have also paid over $30 per share in dividends, and as you can see on the lower right, we have generated a 15% annual total shareholder return since our 2005 IPO, significantly outperforming the S&P 500.
I’ll talk about our outlook on Slide 12. As you can see on the chart, we expect our adjusted earnings per share will decrease from the fourth quarter of 2022 to the first quarter of 2023. This reflects the combination of several factors. The first quarter is typically the slow season for dry containers, which adds pressure to the generally slow market conditions. In addition, the first quarter has two fewer days and we charge our customers on a daily usage basis. We also do not expect the unusual items which added $0.13 to the fourth quarter will be repeated.
We expect the mix of factors will be different after the first quarter and expect the pressure on our key operating metrics and profitability will ease. Seasonality typically improves as we move toward the summer and we expect customer off-hires will slow due to this positive seasonality and as their excess container inventories shrink. We expect sales prices will stabilize after their return from elevated to normal ratios compared to new container prices, and we expect we’ll continue to benefit from ongoing share repurchases.
The chart also highlights the durable enhancements we’ve made to our business. We expect our 2023 earnings per share to be in the range of two times our pre-pandemic level despite the challenging market environment.
I’ll finish the presentation with Slide 13. Triton has an exceptional franchise and we delivered outstanding performance in 2022. Our market is currently challenging but we are confident about our performance and optimistic about our opportunities. We have significant market advantages and have made durable enhancements to our business. We expect our profitability and return on equity will remain high. We are confident we will continue to build shareholder value quickly even while the market remains slow, and Triton will be ready to support our customers and well positioned to capitalize on renewed fleet investment opportunities when market conditions inevitably inflect positively.
We’ll now open up the call for questions.
Question-and-Answer Session
Operator
We will now begin the question and answer session. [Operator instructions]
Our first question will come from Larry Solow with CJS Securities. You may now go ahead.
Larry Solow
Great, thank you so much. Good morning everybody.
I guess my first question, Brian, is sort of just a high level question. You discussed things seem to be normalizing, less congestion. Curious just on the fleet size, the shipping container fleets. Do you feel like–you know, are they inflated versus historical? I’m just wondering if you have any color or feel for that. Do they plan on–you know, do you feel like they’re remain higher than where we were, just because of all this stuff that happened with the ports and maybe shippers don’t want to risk that happening again? Just getting a feel, your feel if there is one, of directionally where the size of these fleets, what they are today and where they might be in a couple years.
Brian Sondey
Yes sure, thanks for your question, Larry. When we look at what happened over the last couple of years, we saw very large new container production volumes in 2021, and it was large to accommodate both the surge in trade volumes as well as just a variety of pandemic-era bottlenecks, like waiting times at the ports and a shortage of truckers. When we look at the level of production in 2021, say compared to trade growth, we estimate that there was something in the range of probably 5% to 10% too many containers in the fleets of our customers, when market conditions slowed during the middle of 2022 and as the bottlenecks eased. So that still is our estimate, that something in the range of–you know, the fleet has to normalize between 5% and 10%, bringing container supply and demand back into balance.
Fortunately, one of the great strengths of our business is that there’s a short order cycle for containers, typically only a few months, and we’ve already seen new container production volumes fall significantly, to the point now where the container fleet is shrinking month over month. Even though the economy outlook is tough, I think the outlook for trade growth is still somewhat positive, and that eats into that excess as well.
I think as you maybe referred to in your question, we do expect customers to hang onto a little bit more container fleet, say, resiliency than they had before the pandemic, when their focus was almost exclusively on efficiency, and so I think it really is a question of just how long it takes for the reduction in the container fleet, for low production and ongoing sales and then that coupled with hopefully some trade growth as inventories normalize and retailers and wholesalers start stocking the shelves again, and then just, I think, some extra containers in the fleet due to the focus of our customers on resiliency, and perhaps some of the impacts of slow steaming due to the tighter IMO rules on emissions, and also just the cost savings that customers get from that.
I think there’s a variety of things that have to happen, and they’ll happen – we’ll see when, but it’s already underway.
Larry Solow
Got you. Then in terms of just container purchases for you guys, it looks like you basically were close to your maintenance level in 2022. Per your example, you repurchased almost 14% of your shares, so it kind of matches your example there, but just curious, you’re spending–obviously your trajectory in the back half of the year, you spent less than $200 million, I think $50 million in Q4, and it sounds like maybe this year starts off slow. I realize some of this is just replacement, so how should we think about any gauge in what spending will be this year, is it potentially below that maintenance level?
Brian Sondey
Yes, our level of spending was around the replacement level in the first part of 2022. It feel below replacement level towards the back half as the market really slowed down, and our fleet size decreased a little bit during 2022 especially in the second half. Right now, we’re investing at below our replacement level just because there’s not much need for customers for additional containers.
That said, we do try to anticipate the change in market dynamics and we try to invest ahead of that inflection, and so we do expect at some point here, we’re going to turn the taps back on for repurchases, both anticipating the market inflection and then obviously to serve it when it occurs. But in the meantime, we do remain quite focused on share repurchases – we think that’s a great use of our capital and builds shareholder value quickly for our shareholders, and so again for the moment, we’re focusing on share repurchases but that will change.
Larry Solow
Great, and if I could just sneak one more in for Michael – first of all, congratulations and welcome. Just on the direct operating expenses line item, I think you kind of called this out a little bit, directionally it was–I see why it went up, it went up a little bit more than I thought, but I guess perhaps most of that was due to repair, handling costs that you guys get reimbursed for. Was that higher than normal this quarter and that kind of drove that direct expense number a little bit higher sequentially?
Michael Pearl
Yes, there’s two parts in there. One is storage, so as we showed, utilization is down a little bit so we do experience higher storage expense, and then with pick-ups and drop-offs from our customers, that does generate ancillary fees, so some of that shows up in opex but then there’s also some offsets in the revenue line as well for that.
Larry Solow
Got it, great. Okay, appreciate that. Thanks everybody.
Operator
Our next questions will come from Michael Brown with KBW. You may now go ahead.
Michael Brown
Great, hi. Good morning. How are you guys?
Brian Sondey
Hey Michael – good, thank you.
Michael Brown
I was looking at your EPS range for 2023, and just wanted to see if you could put a little bit more meat on the bone to help us understand what’s the difference between how you’re thinking about the lower bound and the upper bound, and what would cause you to maybe deliver results closer to the upper bound versus the lower bound? What should we think about there?
Brian Sondey
Yes, so I think mainly it’s just what happens to the market. I think if we were to be at the lower bound of our expectations, that just means that the market has evolved a little bit slower than we expected, that that supply-demand normalization took more time than we had hoped, and perhaps that new container prices fell to ranges below where we had expected, which can push used container prices down. In general, it just reflects probably a little more utilization pressure than we expect to see, that perhaps we don’t see any positive kind of seasonality as we move from the first to the second quarter for our utilization or sale results. I think that kind of tracks to the lower bound.
The lower bound is pretty well protected by the leasing margin and the strength of the lease portfolio. The quickest thing that adjusts downwards is the gain on sale, and the gain on sale was quite high in 2020, even through the fourth quarter – you know, sale prices held up very well, and we continue to expect that to normalize down. But as I pointed out in my prepared remarks, once we see the ratio of used prices and new prices get back into something of a normal range, we do expect that reduction to slow down. I guess perhaps the lower bound might also be defined, if that normalization doesn’t happen and sale prices go to be lower ratios than we typically are, which we don’t expect.
The upper end of the bound is just the opposite of those things, that we see customers, their fleets stabilizing as we head towards the peak season. Perhaps we see an inventory restocking cycle in the U.S. that drives some trade volume, and we just see utilization stabilize better than we’d expected and maybe even start ticking upwards. Typically when we do see container supply-demand back into balance, we can get our used equipment back on hire quickly, and so really it’s just–again, we’ve got a pretty good floor performance because of our lease portfolio, and again like to point out, as I did in the prepared remarks, that even that lower bound is something in the range of two times our pre-pandemic performance, and so we do expect to hang onto a lot of the benefits of our recent investments and lease portfolio improvements, and then up from there, really, just as the market improves.
Michael Brown
Okay, great, so you’ve got clearly some very different scenarios to consider. Thanks for giving us all that guidance and color.
Brian, what have been some of your early observations after China’s reopening here? What are customers saying, and how has–what have you guys noticed in terms of how that has impacted containerized trade, if at all yet?
Brian Sondey
Yes, so I think the main thing I’d like to point is that for us, as a leasing company, what we really focus on is the head haul trade – that really is what drives the customers’ need for more equipment or perhaps if they have too much equipment, and so really what drives demand for our fleet is consumption in the U.S. and consumption in Europe, as opposed to economic activity in China or consumption there.
Obviously there’s a connection – you know, there were certainly times in 2020 and ’21, and maybe a little bit early in ’22 when retailers and wholesalers in the U.S. and Europe couldn’t get everything they wanted, and so what was happening in China impacted trade volumes. The sense I have now is that with most–certainly I think retailers and so on being over-stocked in the U.S. and in Europe, that we haven’t seen a bump in trade volumes as China’s reopened on the head haul trades, which are, again, driven by consumption here.
Michael Brown
Okay, great. Thank you for taking my questions.
Operator
Our next question will come from Ken Hoexter with Bank of America. You may now go ahead.
Adam Roszkowski
Hey team, this is Adam Roszkowski on for Ken Hoexter. Thanks for taking my question.
Just first off, could you, maybe Brian, just run through what percentage of boxes will expire this year and ’24, ’25, just to get a sense of the exposure to some of those rolling off?
Brian Sondey
Yes, sure. I think both Michael and John O’Callaghan referred to the fact that something like 88% of our container fleet as weighted by net book value is locked in on longer term leases, so just naturally there can’t be too much that’s expiring. What we tend to focus on when we think of expirations and market risk and earnings risk are the portion of the fleet that’s expiring that would have to be re-marketed. We find even when market conditions are tough, we usually generate gains on selling our used containers, and so we typically don’t look at that as providing too much exposure to challenges in any given year.
We typically include, and it’s in this presentation, a chart showing what percentage of our fleet is expiring, or has already expired and that is expiring over the next few years in each of those years for equipment that we have to re-lease at the end of the current lease. That’s Page 15 in the investor chart. What that shows is for our dry containers and reefers, something like a little under 2.5% of the fleet by CEU is already expired and needs to be re-marketed when it comes back to us, and then an additional little bit over 5% will expire during the course of 2023 – again, containers that are expiring and will still be leasing life and need to be re-marketed.
In total, something in the range of 7% to 8% of our fleet is expiring off-lease this year or already expired and needs to be re-marketed. That is a very low number for us historically. Probably the last time we went into slower periods in the market in 2015 or 2019, those numbers were probably two to three times higher, and it’s one of the reasons why we look at the going forward and feel we’ve got very nice projections for profitability and returns even if market conditions remain challenging for some time.
Adam Roszkowski
Got it, thanks for that.
Then maybe just on utilization, how should we think about sort of a floor level for utilization given the high mix of life cycle leases that you’ve built in here? Any thoughts around that?
Brian Sondey
Yes, so again, because of what you’re talking about, the life cycle leases and just what I was saying before, this very high percentage of containers locked away on multi-year leases, we do think the floor of utilization is going to be high. We include a lot of long term fixed in our operating deck, but you can see that that’s sort of, I say, a low point for utilization if you go back to some of the [indiscernible] on previous years has been increasing from something–we got down to maybe 90% floor utilization in the financial crisis, perhaps 92, 93% in the industrial recession in 2015 and ’16, and it got down to maybe 95% during the trade war of 2019 and the COVID lockdowns in the first part of ’20. It’s been an increasing flow.
We’re hopeful that we’ll continue to see that increase and that will see our utilization bottom somewhere in the mid to upper 90s during this cycle. But again, we’ll have to see how things progress, and obviously if the cycle is somehow worse than prior cycles, that would offset some of the benefit of the improved lease portfolio, but overall we’re very confident that our performance–you know, our utilization, sort of our key leasing metrics will stay very strong because of the portfolio.
Adam Roszkowski
Got it, thank you. Then just a last follow-up, maybe just talk about day rates, where they are now versus a year ago, and how you see that progressing; then on the trading revenue side, they were down, but maybe just give some color, are liners looking to unload more boxes right now, and just help me think through that.
Brian Sondey
Yes, so maybe just when it comes to market leasing rates, we saw market leasing rates reach all-time record levels in 2021 and the very early days of 2022, just because box prices were very high, close to two times the average for box prices. Since, I’d say, summer of 2022, we haven’t seen a lot of leasing activity. Customers, as I was saying, are generally over-boxed, and where we do see activity, it’s very small. Shipping lines might have some requirements on a location and day basis just because they ran out for whatever operational reasons in certain locations.
But rates have come down and so I think the best thing to look at is new container prices, and new container prices peaked at close to $4,000 in either late ’21 or early ’22. We estimate right now–we haven’t bought containers for a while for the leasing fleet, but we believe it’s in the range of $2150 or so, $2200 for new container prices. That’s up a little bit from where it was at a low point, perhaps in October-November, but that means lease rates–you know, when the market tightens and we start doing transactions again, it will be centered around wherever container prices happen to be at the time.
Adam Roszkowski
Got it, thanks for taking my questions.
Operator
Our next question will come from Liam Burke with B. Riley. You may now go ahead.
Liam Burke
Thank you, good morning Michael. Good morning Brian.
Brian Sondey
Good morning.
Liam Burke
Brian, has there been any discussion–I know the liners are–or the container shippers are pretty strong in terms of balance sheet, so there’s not a lot of fussing there. But is there any talk of any change in duration or rate on existing contracts?
Brian Sondey
Yes, so maybe just as you point out, one of the things that is very nice at this point in the cycle is that in prior down cycles in the shipping industry, there’s always a lot of questions we get from investors, and obviously we look very carefully too on the credit condition of our customer base, and just the profitability and also de-leveraging that happened in the shipping industry has been extraordinary. We look at the credit of our customers as being in great shape despite the fact that they’re heading into a more challenging period.
Also, it’s worthwhile noting for our customers too that when people talk about what’s going on in the shipping cycle, the ship orders have a very different order cycle than containers, that we expect to see the vessel fleet continue to grow in 2023 and ’24 where we’re already seeing the container fleet shrinking, so again it’s that kind of core difference in the cycle for our market relative to the cycle for our customers, the shipping lines.
In terms of the focus on lease durations, we’ve actually found that over the last number of years, and we think it’s going to continue, that there is kind of a win-win thing we’re seeing, where customers are willing to keep containers on hire for longer periods of time, primarily on life cycle leases for used equipment. We like that because it takes volatility out of our business and gets us extra revenue years. The customers do it for several reasons, not just because we push for it, but we’re able to give the customers discount on the per diem rates in return for extra years of duration, just because we think of the re-leasing activity and the renewals on an NPV basis.
Then also, we’re able to give our customers much greater logistical flexibility which can have real back haul savings for them, given our ability to sell container all over the world, in particular in inland locations, and so we’re just kind of seeing this general migration where maybe in the past, we had put a container on a long term lease at the beginning and then several iterations or shorter leases, where now it really has become kind of a two-step model, an initial lease for new equipment that goes from in normal years, five to eight years last year or 2021, out to kind of 11, 12, 13 years, and then very often either the renewal of the pick-up of used equipment is onto a life cycle lease that, in many cases, can carry out well past year 15.
Liam Burke
Great, thank you Brian.
Michael, 12% of your debt is not fixed. How do you look at that in terms of capital allocation vis-à-vis the dividend and the buybacks?
Michael Pearl
I think most of our fixed and floating is just driven by our lease portfolio. We do try to hedge pretty much all of our long term leases and finance leases to make sure that the debt that’s financing those containers is locked in as the revenues are locked in, so that’s really how we manage that kind of fixed-floating balance, which is why it’s in that upper 80% category, which is also generally aligned with what our lease portfolio looks like.
Liam Burke
Right, but during the year last year, you did reduce–I mean, your net debt was reduced ’22 over ’21. Is there any thought on the portion that is not fixed or hedged, on reducing that, or are you going to maintain certain levels of debt for capital efficiency and then just buy back stock or pay dividends?
Michael Pearl
Our leverage has been–I’d say leverage has been pretty consistent. That’s something, I think as Brian mentioned, that we are able to use tremendous cash flow to not only increase our buybacks or buy back at a high level, but also de-lever a little bit throughout the year, so that’s kind of one decision point. I think how much is fixed or floating is more driven by the characteristics of our lease portfolio, if that makes sense.
Brian Sondey
And when we think of leverage, we typically look at the ratio of our net debt compared to our revenue earnings assets and actually adjust it a little bit for preferred stock and for some customer prepayments. But generally speaking, we try to keep that ratio in a relatively constant place, and so if assets are shrinking like they did towards the end of last year, usually we’re paying down debt in addition to using cash flow to buy back stock, and if assets are growing, usually we’re issuing new debt to finance at least a portion of that asset growth, again maintaining constant leverage ratios. As Michael said, we look at the amount of debt and the balance of fixed and floating as being somewhat disconnected, with the amount of debt being targeted towards keeping our ratios constant and the fixed and floating mix really oriented around making sure that we’re properly hedging our long term lease portfolio.
Liam Burke
Great, thank you Brian, thank you Michael.
Brian Sondey
Thanks Liam.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Brian Sondey for any closing remarks.
Brian Sondey
Just like to thank everyone for your continued interest and support for Triton. Thank you.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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