Costamare Inc. (CMRE) Q1 2015 Earnings Report, Transcript and Summary

Thank you for standing-by ladies and gentlemen and welcome to the Costamare, Inc. Conference Call on the First Quarter 2015 Financial Results. We have with us, Mr. Gregory Zikos, Chief Financial Officer of the company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I must advise you that his conference is being recorded today Wednesday, April 29, 2015. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read slide number two of the presentation which contains the forward-looking statements. And I will now pass the floor to your speaker today Mr. Zikos. Please go ahead sir.

Thank you and good morning ladies and gentlemen. During the first quarter of the year, the company continued to deliver positive results. Recently we placed an order, together with our partners York Capital, for one additional 11,000 TEU containership vessel, to be built by Hanjin in Philippines. The ship is expected to be delivered in December 2016 and Costamare will own a 49% stake. Our joint venture with York has been progressing quite well and since inception we have done deals of $1.1 billion. All investments have been performing well and we are currently in discussions with our partner regarding the extension of the investment period. Regarding the market, there is a positive momentum. Charter rates have been rising, the number of idle fleet is below 2% and activity remains high. We have no ships laid up, while the ships coming out of charter this year provide an upside based on today’s market conditions. And now moving to the slide presentation. On slide three, we are providing a summary of the recent developments mentioned earlier. These include a signing of an 11,000 TEU new buildings, the discussion with our partners to extend the investment period and our Framework Agreement and the dividend on our common stock and also dividends on both classes of preferred shares. On slide four, we are providing a summary of the chartering agreements which took place during the quarter. As of today the company has no ships laid up. On slide five you can see the first quarter 2015 results versus the same period of 2014. During the first quarter of this year, the company generated revenues of $121 million, EBITDA of $82 million and net income of $23 million. For the same period of 2014, the revenues amounted to $115 million and EBITDA and net income to $73 million and $17 million respectively. Constantly with our previous press releases, we feel that the EBITDA and net income figures need to be adjusted for the following non-cash and two one-time items. The accrued charter revenues and the resulting discrepancy between revenues received, revenues accounted for based on the straight line amortization schedule, the gains or losses resulting from derivative instruments; the amortization of prepaid lease rentals which is a non-cash charge resulting from the sale and leaseback transaction and the non-cash G&A expenses. Based on the above, the first quarter adjusted EPS amounts to $0.38, in the first quarter adjusted EBITDA amounts to $86 million. On slide 6, we are showing the revenue contribution for our fleet. More than 90% of the contracted cost comes from Maersk, MSC, Evergreen and Cosco. We got $2.2 billion in contracted revenues and the remaining time charter duration of about four years. Slide seven is comparing existing market rate versus today’s market levels for vessels opening during the remainder of the 2015. As you can see, if we were to re-charter today those vessels at today’s market rate, the revenues for those ships would be on average 38% higher. For example, the 35,000 TEU ships in our fleet are getting today on average $7,300 per day versus a market today in the region of $13,000. Based on the above, it is obvious that the company does not face any re-chartering risk. On the contrary, this is coming out of charter this year, our charter levels that are below today’s market. And moving to the last slide, on the last slide we’re discussing the market. Charter rates have been rising, especially during the last months. The number of idle ships remains at very low levels. The order book is at around 18%. We feel we are well positioned to capitalize on market movements either by chartering ships in a higher market or by acquiring assets in a low asset value environment. This concludes our presentation and we can now take questions. Thank you. Operator?

[Operator Instructions]. And our first question comes from the location of Ben Nolan with Stifel. Please go ahead.

My first question relates to the JV and you made some reference to [Technical Difficulty].

I think his line dropped. The next is Fotis Giannakoulis with Morgan Stanley. Please go ahead.

I want to ask about your operating expenses were quite below your budget, quite below the street estimate. What drove this outperformance and is this something that we can see in following quarters or this is just a one quarter item?

On the operating expenses, these were on average around $5,900 per day per vessel. And those also we need to factor in the fact that we have like certain ships flying the Greek flag, which on average is more expensive compared to running a vessel with flag of countries [ph] like Libera Monrovia et cetera. Now to some extent, we were helped by the euro dollar exchange rate which has moved in our favor. On the other hand, we are trying to be as efficient as we can; being in shipping for 40 plus year definitely helps. Now, if I must predict whether going forward we should have a target running expenses at those levels, of course our target will be to go even lower. However, for budgeting and for modeling purposes, I think that it’s prudent to be conservative and stick to the budget we have today.

I want to ask also about your deal with York Capital. You mentioned that all the projects that you have done so far, they are performing well. And has that led you to expand your agreement for even longer? Can you give us a little bit more color what were the other reasons that made you continue this agreement? I understand Costamare has a lot of capital that could deploy even on its own. What are the benefits of this agreement with your capital?

First of all, regarding York, up to now what we’ve done is that we have ordered together 10 new buildings, five 14,000 TEUs and five 11,000 TEUs. We have deliveries starting from the end of this year. And we have also bought together four more second hand vessels. In total, this is close to $1.1 billion CapEx. So in today’s environment, all those investments today are positive. And we feel very happy with our cooperation with York up to now. And this is the reason we talk about extending it further. It is a mutual beneficial relationship. Of course Costamare has capital on its own; the same applies for York of course. But it is a capital intensive business. And we share the same mindset with York. So, we feel that since those investments upto now are doing well, since the relationship is in the same mindsets that we also share the same risk tolerance, I think it makes sense to continue co-investing in deals going forward. We are generally positive about the market. We feel that there will also be a lot of opportunities. So, we don’t see any reason why not to extend this relationship; as I said up to now has been quite successful.

And can you give us a little bit more color, what led you order another 11,000 TEU vessels? Is there any preference on this particular type of vessels? I’ve seen you’ve ordered the 11,000 and 14,000 TEUs and now there are liners; they are ordering even 20,000 TEUs. And if you can also comment about the chartering of the five 11,000 TEU vessels, do you feel very confident that this is going to happen soon or at least that’s what -- what led you to order one more while the first four vessels, they still have not got any contract?

First of all, the five 14,000 TEU ships, they charted for 10 years at a rate which we feel makes sense that the whole investment is I think quite attractive. And we think that this is a good deal, both for the charterers and for the ship owners’ perspective. Now regarding the 11,000 TEU ships we have ordered, your right and we have ordered one more from the same shipyard and the deliveries will start from the end of 2015. We feel very comfortable with this specific asset size. The ships are not chartered yet they. However, these are 2016 deliveries. There is a lot of interest from charterers. The contract price, although I cannot disclose the exact number I can tell you that it is at comparative terms. So regarding the chartering and then the subsequent financing of those vessels, today we feel extremely comfortable. On average, on those five 11,000 TEU ships Costamare holds 40% stake and York holds the remaining 60%.

And when shall we expect to see a charter; is this something that is going to happen during 2015?

The first delivery is like end of 2015 and the last delivery is at the end of 2016. So, there is two times; our goal is to sort of optimize our earnings from those vessels. And we don’t feel that we should carry especially as we are going close to delivery. So at this point in time, we take our time. Of course we are in discussions with charterers in order to optimize the returns of this investment.

Greg, one last question about the market; we’ve seen the last three, four years the big ships being able to get quite attractive charter rates with double-digit unlevered returns. But the smaller vessels for a long period of time, they were totally stagnant, close to OpEx levels. And all of a sudden, the last three months, they nearly doubled. What drove this spike in panamax and sub-panamax charter rates and what were the reasons that these vessels, they had been kept at so levels the prior three years?

First of all, it’s all supply and demand. Now what happens, what we have seen, we’ve seen especially there 3,500 TEU ships charter rates picking up from levels in the region of 7,000 and 7,500 per day, reaching 13,000 per day. Apparently there is a lot of demand for those vessels. To some extent this comes from the fact that liner companies, they have launched new services especially into Asia, which made sense also bearing mind their price levels for their fuel expenses? So, it is a regional demand product to owners. And in container shipping as general in shipping maintenance [ph] is required; charters rates can pick up quite fast. And this is what we have now witnessed. In the past, we saw the panamax rates picking up. Let me remind you that a year ago, panamax might be using 7,000 to 8,000 per day; we’ve seen levels of 14,000 15,000 16,000 now. To some extent, this has been assisted by the congestion in the U.S. West Coast. And for the 3,500 TEU ships, as I said the launching of new services by liner companies especially into Asia taking advantage of low fuel expenses have brought demand upwards for those ships. I cannot predict to what extent it is sustainable and where rates will go. All I can say is that we’ve seen a rising market, especially for those charter classes. And also regarding asset values, since they are correlated to charter rates, asset values for the 3,500 TEU ships have picked up considerably over the last months.

Can you give us an idea of the -- you have bought something like 20 vessels over the last years of similar sizes and the price that you have paid was around $10 million, if I am not mistaken, each of these vessels. If you would have to sell these vessels today, what would be the price and are there any thoughts as asset prices move higher along with rates to monetize some of these vessels?

I think those vessels and we just see on one of our slides, we are showing there re-chartering upside from the ships opening in 2015. And we have quite a number of smaller vessels which are coming out of charter this year. I don’t think that we have an intention of selling those ships today. But what we will do I mean assuming the same market conditions, as of April now; I think that those ships instead of 7,000 or 8,000 per day, they could be getting 12,000, 15,000, 14,000. So there is definitely a re-chartering upside. Asset values today for those ships may not look as attractive as they used to be when we bought those vessels. So from our side I think it is the right timing to sort of have some incremental free cash from those ships. Let’s not forget that container ships have a 30-year useful life. And good investments meaning ships that we have bought in a low asset value environment, we tend to operate them for years in order to maximize our returns.

I am very glad to inform that Mr. Nolan is back with us. Ben Nolan from Stifel. Please go ahead.

So, what I was going to ask here or one of the questions was related to the York joint venture and you discussed that some with Fotis. But is this something that in the long -- well may be, can you tell me what is the long-term plan for this? Is the idea to may be buy the whole thing in or is it to continue to operate it as a separate joint venture indefinitely, how do you think about that going forward?

The agreement we have with York is that we are co-investing. So, both York and ourselves will put equity. We are mainly the ones who are sourcing the transaction. And Costamare has the technical and commercial management of the vessels. And the original investment period was for two years which is expiring in May 2015. And this is a period which we have agreed to extend. Now, going forward, let’s not forget that we have started the process for an MLP which because of market conditions, we are considering what is the optimal time to launch but this is also something where those -- I mean this is also a vehicle where new buildings with long-term charters could find a home. And we feel that this would be a good investment proposal for MLP investors. So this is one alternative. Otherwise, after we spoke investing with York which it may take some more years, then we will consider what it’s going to -- wants to do. They could sell their portion of the vessels, so we could buy their portion. There are a lot of alternatives but let’s not forget that the MLP for which we have started the process is also a viable solution.

Along the same lines, with respect to the new builds, obviously just sort of the additional one in the Philippines; can you may be tell me or talk me through what is currently the market in terms of rates of return on these kind of new builds or at least roughly are rates of return on new builds at what you would say are adequate returns on capital or is the fact that you haven’t chartered those other vessels because the market is still not quite there yet or is there a sufficient appetite in the market?

There is appetite in the market for these types of vessels and especially for 2016 deliveries. The reason that we haven’t yet fixed those vessels is because we feel on the contrary that there is a lot of appetite. So, we want to optimize that transaction. Now, in every second transaction, both York and ourselves, the first thing we are taking care of is to minimize our downside and how the deal within our risk tolerance levels. So we feel that the part cost [ph] of those vessels based on where the market is today, definitely covers our downside. And then the more upside we can secure, the better of course it will be. I’m afraid I cannot go into more details on percentage wise with our expected cash on cash return or what is the expected charter rate for what period for those vessels because we are in the middle of discussions. So, you will have to bear with us for a bit. When those ships are chartered and financed, we can have in more detail the discussion on that transaction.

But sort of keeping with the new builds and sort of my question is with respect to the activity and you alluded to it earlier; it sounds like your capital strategy at the moment given a little bit of an improvement in second hand prices is may be a little bit more towards deploying capital on new builds. My question is are you beginning to see new build prices fall and become a little bit more competitive? Obviously there is early been any dry-dock vessels ordered it on, I am sure the shipyards are eager to fill their spots and steel prices are down. So, are new building prices for bigger ships becoming a lot more compelling relative to where they used to be?

First of all, let me start with the second hand prices, for prices today for the 3,500 TEU ships, they are not as attractive as they used to be. So, we would -- today we might think twice buying 10 or 12-year old 3,000, 3,500 TEU vessels. Considering where market levels are with both -- a lot of those ships in the past where asset prices were at lower levels, so this is not what we might be doing today. However, everything -- the situation might change in some quarter. So, it’s all the matter of timing and price. And for those -- today as I said they may not be as attractive as they were. Now for new buildings, we are looking at new buildings transactions with or without a charter. With the charter attached we where put order we just want to make sure that our residual value risk is at levels with which we feel comfortable. I don’t want to predict where new building prices will go. But I can tell you that also new buildings today with or without the time charter attached, depending on the specifics of its asset size and transactions, it may make sense. And we are definitely looking both on new buildings and second hand prices and second hand ships, of course bearing in mind that some second hand vessels today may not be as attractive as they used to be.

Are you seeing new build prices coming down at all?

I’m afraid that I cannot a direct answer because it depends on the size and it depends on the delivery, so otherwise I give an answer which might be misguiding you.

The next question comes from Mark Suarez with Euro Pacific Capital. Please go ahead.

Last time you talked on your new build prices and second hand prices here on the last question. And I’m wondering here, is the idea to continue to invest. I’m getting the sense that co-investing with the New York framework for addition of new build could be a good alternative in the New York term and is this an opportunity to go over some second hand charter attached transactions you would do so? Is this something you’re currently looking at and do you have any potential targets in mind in the second hand market and what sort of vessel sizes and segments are you looking towards? I know you talked about some of the 3,000 TEU range but in the other thoughts on that?

We are looking at a lot of projects and we are inspecting a lot of ships, whether we end up buying them or not? Of course, we look at several hundred vessels. It’s not only the 3,000 TEU vessels or the panamax which have also picked up, also other asset classes which we look at. For obvious reasons now, we felt having any close transaction, I cannot reveal more. But it shows a matter of price, risk and return. So ships that we find today that their asset value has picked up, we will think twice before buying them. On the other hand, buying ships or buying specific asset classes which are at historically low levels or close to those levels, of course we will consider. We are looking at a lot of ships and of course we also look at the new building transactions. But we don’t have a predetermined growth rate. And our goal is not to be the biggest one. Our goal is to be the healthiest one from a balance sheet perspective and from a cash liquidity perspective and the most profitable one. And profitability, the way we sort of measure, it is in terms of cash on cash IRR. So under those two parameters, of course we look at lot of projects. But we don’t have to create volume; we don’t want to buy ships for the sake of growing. We are buying ships just because we feel that the returns on mid-single investments make sense; otherwise we don’t proceed with the investment.

And do you feel that asset -- given the asset price run up here on the second hand market, do you feel they still sort of meet your return benchmark or do you feel you could still buy some time here and maybe over the next 18 months to 24 months pull the trigger on better rate returns?

Not all sorts of asset sizes have picked up in the second hand market. Charterer rates and assets values in the largest sizes above 6,500 TEUs, they have not picked up. So, there is a whole range of potential investments we would consider. And I give myself both second hand vessels and new buildings.

And then going back to the new book; is there an opportunity here as you co-invest and maybe you going into additional new builds; would sales leaseback transactions or additional sales leaseback transaction still be a tool to maybe potentially monetize further acquisitions going forward like you’ve done in the past?

If it’s something that makes sense, of course we will consider it. We’ve done sale in leaseback transactions; it’s actually alone. But the terms and the structure based on specific circumstances, it may be quite attractive. So, it is something that makes sense for a specific asset, of course we will consider it. We’ve done it quite a few times, successful up to now. And as I said, I don’t think that raising the debt is an issue; whether it is commercial bank debt or whether it is sale leaseback transaction or whether it is something more structured, however in terms of debt. This is something we can do. And that is not the issue. Our main concern is to find the right assets which will have the potential of first, covering our downside risk and then hopefully providing us with upside. But the rising of debt today or at least from our experience, it is not something that it is a concern to us.

And then lastly, I apologize if I missed it, on going back to that one-off new build acquisition [Technical Difficulty] [33:40] was this pumped mostly by a very good region that you can get out of the ship pricing; what’s pricing and main catalyst to your recent transactions for vessels of similar size? What sort of pumped you to go after this is one-off this vis-à-vis the original four on the same shipyard?

I think the price and also factoring in the delivery time which is within 2016 and taking into consideration our view about charterer’s appetite for that type of vessel, those all made sense large and this is why we proceeded with that transaction.

So, you feel confident that you can -- is this the chartering of those vessels a possibly an event for this year 2015? Are you sort of closing some sort of employment for these vessels here?

We feel comfortable with those new buildings, extremely comfortable. Otherwise obviously we wouldn’t have put this additional order. I cannot comment when exactly the chartering for those five ships will be effected. As I said we are not in a hurry but we are extremely comfortable and confident with the medium and long-term returns that those ships will generate.

The next question comes from Shawn Collins with Bank of America. Please go ahead.

Congrats on the new building contract for the 11,000 TEU. Can you just comment on how you chose the shipyard and your past experience with this shipyard?

In Hanjin Philippines we have already an order four, 11,000 TEUs. On those four, we have also added the fifth one. I can tell you that the price for all those ships, it is the same. And both from a specs perspective and from a pricing perspective and also from a delivery time perspective, we feel extremely comfortable with the package we brought. So, we feel comfortable with that investment. There have been questions regarding the timing of fixing those vessels. And as I said, we take our time. We don’t feel that we should be in a hurry. There’s a lot of interest for those type of ships. So, we will try to optimize our investment.

And then, I know it’s early and how you finance you’ll figure out over time and you’ve already commented on this a bit. But can you comment just in general on the health of the shipping finance market and more specifically, how active the traditional shipping banks are?

Sure. First of all, compared to the situation we witnessed back in 2005, ‘06 or ‘07, I would say that the ship financing market today is much more healthy and banks have become much more selective which I think it is a good sign for the whole industry. I can tell you that as far as we are concerned, raising debt is not an issue, whether this is in the form of commercial bank debt, plain vanilla new building, pre or post delivery financing or plain vanilla second hand financing for an acquisition of the vessel or whether it is a sale leaseback or whether it’s more structural type of a transaction. So, raising the debt is not an issue. Commercial banks, the traditional ship lenders, as I said, have become more selective. A number of them are sort of in the process of reducing their loan portfolio. This doesn’t mean however that they don’t extend loans as long as the fundamentals are there and make sense in the loan and as long as there is a strong sponsor with new a building for instance with the time charter attached with a strong charterer where the cash flows concern with the debt on a standalone basis. These are transactions that make sense and those transactions should be funded. And let’s not forget today that asset values compared to where they used to be in 2006 or ‘07 are at much lower levels. So 60%, 70% or 80% leverage today is much more healthier than 70% or 80% leverage in 2006 where you had like inflated asset prices. So the long story short, there is bank lending available, much more selective which makes sense. And raising debt as far as we are concerned, we don’t consider this an issue. Of course we try to be sufficient and optimize our debt structure but there are really a lot of alternatives.

Would you consider the bond market at all -- the bond market certainly has been less active and receptive to shipping finance but is that something you would consider possibly?

For the time being, we haven’t done any bond financings for a couple of reasons. First of all, several times, it’s more expensive compared to commercial bank debt. Secondly, if it is to acquire a vessel, let’s say a second hand vessel, a five year second hand vessel with like, and you fund it with a bond, with a five year bond which is not amortizing, practically you are sort of funding depreciating asset with a non-amortizing financing instrument which may or may not make sense. This may create a lot of residual risk and this may lead to a substantial refinancing risk at the end of let’s say the five year period. Now I am not saying that this is something we may not do in the future on a corporate level but up to now in every single transaction we have done, we have found a commercial bank debt or sort of a sale leaseback, make more sense. On the other hand as a company as I am sure you’ve seen, we like amortizing our debt. Our sort of capital repayment every year is close to twice our depreciation expense for the year. And bond which is not amortizing, it’s something that might create concerns. It’s something that we don’t want to find ourselves with big bullet payments in due in five or seven years’ time where Costamare and consequently its shareholders would be assuming an excessive refinancing risk.

The next question comes from Gregory Lewis with Credit Suisse. Please go ahead. Mr. Lewis, you might have your phone on mute. The next question comes from Charles Rupinski with Global Hunter. Please go ahead sir.

I just had a really quick question sort of a technical question. Just on the new build program that you, the ships on the yards. Are there any aspects of the technical specifications that are geared toward the speed levels in the loops now and so forth? And should at some point -- it certainly hasn’t have to but at some point if the vessel speeds change, would there be the ability to retrofit or adjust the specifications, should that be the case?

Well, this ability is there; those ships are sort of related echo ships. And the ability to retrofit the ships is definitely available. And the way these specs have been decided, both for those vessels and for the ships which are the 40,000 TEUs chartered, those have been decided bearing in mind the needs of the charterer for instance Evergreen for the 14,000 TEUs and for charterers in general that are going be chartering those vessels within next year or so.

[Operator Instructions] This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Zikos, Chief Financial Officer for any closing remarks.

Thank you and thanks there for being here with us today. We are looking forward to seeing you again at the next quarterly call. Thank you. Operator, I think we are done.

Thank you so much, sir. Thank you everyone. That concludes our conference call for today. Thank you for all of your participation. You may now disconnect.