Costamare Inc. (CMRE) Q2 2015 Earnings Report, Transcript and Summary

Thank you for standing-by ladies and gentlemen and welcome to the Costamare, Inc. Conference Call on the Second 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 this conference is being recorded today Wednesday, July 22, 2015. We would like to remind you that this conference contains forward-looking statements. Please take a moment to read slide number two of the presentation which contains the forward-looking statements. And now I will pass the floor to your speaker today Mr. Zikos. Please go ahead sir.

Thank you and good morning ladies and gentlemen. During the second quarter of the year, the company continued to deliver positive results. On our joint venture with York, we have extended the investment period for five more years, starting from May of 2015. Since inception we have executed transactions of 1.1 billion, all of which have been performing well. Regarding the market, we have recently witnessed a softening in charter rates, especially for the smaller sizes. We have no ships laid up, while the ships coming out of charter this year still provide an upside based on today’s market conditions. And now moving to the slides presentation. On slide three, we are providing a summary of recent developments. This includes the extension of our Framework Agreement with York that the issuance 100 million preferred equity, the dividend on our common stock and also dividends on three classes of our preferred shares. Moving to the next slide. On slide four, we’re providing a summary of the Charter Agreements which took place during the quarter. As of today, the company has no ships laid up. On slide five, you can see the second quarter 2015 results versus the same period of 2014. During the second quarter of this year, the company generated revenues of 123 million, EBITDA of 94 million and net income of $40 million. For the same period of 2014, the revenues amounted to 123 million and the EBITDA and net income to 79 million and 24 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, which are the amortization of the prepaid lease rentals which is a non-cash charge resulting from the sale and leaseback transaction, the contracted revenue and the resulting discrepancy between the revenues received and revenues accounted for, based on a straight-line amortization schedule the non-cash G&A expenses and the gains or losses resulting from derivative instruments. Based on the above, the second quarter adjusted EPS amounts to $0.46, and the second quarter adjusted EBITDA amounts to $87 million. On slide six, we are showing the revenue contribution for our fleet. More than 95% of the contracted cost comes from MSC, Evergreen, Maersk and Cosco. We have 2.1 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 2015. As you can see, if we were to re-charter today those vessels at today’s market rate, the revenues would be on average 23% higher. For example, the 3,500 TEU ships in our fleet are yielding today on average $8,800 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 significant re-chartering risk. On the contrary, the ships coming out of charter during this year, our charter of levels that are below today’s market. Slide eight should be combined with slide seven and shows the timing of our secondhand acquisitions, while the vessels coming out of charter during the remaining of this year. As you can see, we have been trying to optimize the timing of our purchases and by in a low asset value in charter rate environment. Hence while those ships provide for an upside even in today’s market. On the last slide, we are discussing the market. Charter raters have softened over the last weeks especially for the smaller sizes. The number of idle ships has marginally come up to 1.8%. Order book remains at historically lower levels at around 20%. As a company, we are well positioned to capitalize our market moments either by chartering ships in the higher market or by buying assets in a lower asset environment. This concludes our presentation, and we can now take questions. Thank you. Operator?

Thank you. [Operator Instructions] And the first question comes from the line of Greg Lewis of Credit Suisse. Please go ahead, sir.

Yes, thank you. Thank you and good afternoon.

Hi Greg good morning.

So you mentioned that the charter market still remains relatively above some of your contracts. At this point, I realize that they are roll off at different times, but is there the ability as we’ve seen some times statistics forward vessels maybe, maybe you are not going to get that full amount, but is there sort of a thought about potentially, you know hey, if the market is 20% above, what my rates current are. I can fix it may be at a 10% to 15% premium to where my rates are even though my vessel might not be rolling off for another three or six months?

Well, I mean, first of all as a matter of principle, you can always fix on a forward basis and not like wait for the last week before the vessel is coming out of charter. However, there may be a lot of discussion with charters if you decide to short of fix full rate on six months in advance for see if that are coming out of charter let’s say beginning of 2016. I am not sure how much have benefit someone can take, it depends on the asset size, it depends on the charterer whether the charter needs a vessel, it depends on the fiscal condition of the shape. And it may be the case that someone today may not be willing to commit six months forward and as the charter rate is you know highly beneficial for the charterer or you know the charter definitely needed the vessel. So you can’t fix in advance whether you can do it six or nine months in advance. I am not sure about it, it’s only matter of price but it’s going to be a lot of discussions. All I can tell you that from our side, in other part ships we have extension, so the charterer as long as it is a vessel and as physical condition allows it, we can of course start discussing with the charterer two or three months in advance for an extension. And I think the proper thing to do is first discuss with the current charterer of the vessel whether he wants this to be extended. And you know if that’s not the case then you know we might go to a third party charterer. But we definitely start our discussions well it will wealth in advance before the expiry of the employment.

Okay, great. And then just one more from me, clearly we’ve seen a little bit of softness in the smaller vessel sizes, now that should have really have it should have like a no impact on the larger vessels, but as we - so as we think about that the larger vessels, when you - and talking to customers and being in the market, have you note is the amount or the potential for new build growth opportunities is, could you characterize that as where that is today versus maybe where it was earlier this year?

I would say that regarding the buildings there are a lot of opportunities, a lot of projects and there have been recently in the market numerous projects and you know beats by charterers who wanted to order mainly larger vessels through sale and leaseback track which means through a ship owner like us. So there have been a lot of projects in the market lately. Now as you rightly said that charter rates for these model vessels have softened. The markets have peaked out from the beginning of the year which have not being surprise by the fact that the rates have come off to beat and there has been some correction. And the reason for that is simply because the demand was not there in order to support new trade lines or new roots initiated by charterers especially into Asia. And this what led to this charge in the charter rates for the smaller vessels during the first months. The demand is not there and so charter rates have come off because say there is definitely led demand for those vessels and the supply cannot be absorbed now. Going forward, as you know, we don’t enter into projections where the market will be going. From our point of view any short already been meet into a fluctuation in charter rates and to our asset values is not something that is going to affect our business model. But with our north of say four years of time charter coverage, the backbone of the fleet, the larger vessels are charter out for longer periods and we have a long term type of business model. So any short time fluctuations definitely create opportunities but a softer market for this model vessel, we do something that we were expecting, I don’t think it affecting at all our business model. Quite the opposite because see it may create additional opportunities going forward.

Okay, perfect, great, thanks for the color. Have a good rest of the summer.

Thank you. You too, thank you.

And our next question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Yes, hi Greg. I want to start with the joint venture with York Capital, there was an extension of investment period. Can you remind us how much equity you have invested so far and how much equity is left? And why, what is there behind this extension out of that, I mean new transactions that you might be looking and good creating, do you see more opportunities the market. Why and have you changed the investment amount that you were originally planning to?

Yeah, initially there was an investment period of two years. We put together this joint venture in May 2013 with a two year investment period which expired in May 2015 a couple of months earlier. Since then we have started discussions with York and we have extended the investment period for five more years which is going to take us up till May 2020. And then we have four more years for harvesting those investment, so the whole JV including the harvesting period goes up to May 2024. Now - up to now we’ve done total transactions of closely 1.1 billion. The amount of equity built is also a matter of how much leverage we’re going to be getting in some of our new buildings. So I am not sure that I can an accurate number now. However, I can tell you that going forward, there is no limit on the amount of equity that can employed for future business meaning that neither York nor else have put on the side and the amount that has to be used for new acquisitions. As long as we like a transaction, we will proceed. There is no limit. We are well capitalized, then from our side, we have good access and you know and those who are proven access to commercial bad debt to sale in this bad transactions. And the York from their side, I think it is a strategic decision to continue this cooperation for five more years at least. So there is no limit. And the reason we have decided to extend I think up to now, we are both happy with the cooperation. It has been quite smooth. We show the same lines that with York meanings out that we both first cover - we both first try to cover out downside and then hopefully leave some upside toward our shareholders. We have the same level of conservative. And you know at the same time the chemistry between the two companies is something that works. We see a lot of opportunities going forward, so why not extent this agreement for five more year. From our side, we believe that this is that this has been efficient to our Costamare Inc. shareholders. And let me remind you that there are no conflicts in these agreements. All the benefit from those transactions, it’s going to flow to the shareholders of Costamare Inc. There are no private sort of interest or any other type of interests in wanting those transactions.

Thank you, Greg. Regarding the transaction you’ve already done so far, you have the 14,500 - the five 14,000 TEU vessels that they are already contracted, it seems like they have very high financing, if I am not mistaken 80% to 90% financing. What about the financing that the 11,000 TEU vessels? What kind of financing are you looking at? And have there been any discussions about the chartering of these vessels? How many potential customer side, if they are interested in taking these vessels?

Yeah, the five 14,000 TEU ships chartered everything also financed and those will start being delivered from the beginning of the coming year of 2016. The five 11,000 TEU ships, we haven’t financed them yet because we don’t have the charter in place yet. So the financing would not be very attractive. So up to now we paid 50% of the contract price for the four of that we paid 50% of the contract price. And the latest 50% of the delivery payment is upon delivery. So I think by that time, I mean a lot of way or the other we will have arrange financing with this however - which however will be also affected by the charter party we will have in place. Regarding the chartering which was the second part of the question, we have been in discussions with numerous. There is definitely interest for those vessels. And the fate for all these vessels, I cannot get into more details right now. But we feel extremely profitable with charter in potential of those ships which those 11,000 TEU vessels would feel that our in need from our customers.

Can we drive from the previous deal that the economics will be similar, we saw the previous transactions of large vessels getting something like 12 even more than 12% EBITDA yield, is expectation of that something similar is going to be for these vessels as well?

Yeah, this EBITDA yield is also a function of the tenor of the charter party. In the previous transaction, we have a charter party duration of ten years. So the charter eight, the level of the daily charter eight will also be function of the time charter duration. So I wouldn’t like to start comparing numbers now and discuss about our expectations because there is also a lot of discussions that regarding the duration of the charter five. If I want to say, it’s of course we try to optimize the return of those vessels. So unless we have a similar chartered tenor, we cannot compare EBITDA yields. And at this stage, I am not prepared to discuss where there is going to be a longer or a shorter charter party agreement. This is out of discussion as we say.

What is the minimum that you might see and what is the maximum, what is the range of the potential duration of this charter agreements?

I am afraid this is going to be a wide range. I mean the charter party could be from one year to 12-15 years. So I am not sure I am very helpful here. So since we are into discussions, let me give us some time and when those ships are fixed, they are prior to deliver, this is something that we would be more than happy to discuss in more detail.

Okay, fair enough. And regarding the market, we saw that rates they went significantly higher at the beginning of the year, they are - they increased, they almost doubled from a year ago and now the last few weeks they have been softening. Can you explain to us what were the drivers of this big improvement that we saw earlier this year and what are the - a little - elaborate a little bit on the reasons why we are seeing this softening right now? And what shall we expect in the future to be the drivers either on the positive side or on the negative side?

Yeah, now beginning of the year, nine companies decided to initiate new services, also taking advantage over little lower fuel cost and especially into Asia. So this led to additional demand for smaller size tonnage. And since there was a little fair demand for those ships chatter rates picked up significantly. It seems however that this was not sustainable after now. The demand is not there in those trades, so there are - so there is a lot of redeliveries. Charterers may not be willing to commit those higher charter rate levels for a longer period. And this has naturally led to a significant decrease in charter rates. Those lowers charter rates as of today, they are fully reflected in our surprises, although they are fully correlated but there is normally time gap between those two. And this is something that we were not surprised. I don’t think we were able to justify such an increase in charter rates for a longer period of time, simply because there were no strong indicators that the demand would continue being there. Now going forward, I am afraid that cannot be of much sell - it’s all supply and demand. Demand seems to be today rather incurred rather than strong in more rates. So we cannot predict the future. If we know the supply today, we know how many ships especially bigger vessels will be coming into the market over the next six or nine months. I mean this is something we can usually predict whether the demand will be there in order to need to additional tonnage needs or not especially for the smaller vessels, this be seen.

One last question, you know you take delivery of all this new billings that you are having the JV and it seems that like your cash flow is going to be increasing. Can we lead ourselves over the conclusion that the dividend might be moving higher upon delivery of these vessels?

Well, we can definitely conclude that distributable cash flow will be higher. Now the dividend, this is subject to the board’s approval, so it’s not my personal choice. I think up to now we have proved that we’ll add dividends and that we like raising the dividends. I am not forget that we are public for the last five years and we have raised the dividend every times since going public. So as I’ve said in the past, there is only one direction for the dividend and this is up. I can tell you that the company’s cash flow will be growing seemly because of the new buildings excluding any new business, excluding any upside from ships coming out of charter now. We got chartered at very lower rates. We like dividends however, I cannot say more than that, I cannot commit to you know the well-defined dividend platform as a dividend is going to be raised and when. But this is definitely our intention and let me say once more that the finding 5 million, 65% of Costamare Inc. they are no other shipping interests outside of this entity. There are no conflicts unlike in other companies. So and this dividend is the main source of income of the founding family and so for other people who work with Costamare from other side with an average every incentive in the world to have this dividend raised.

Okay, thank you, Greg.

And our next question comes from Mark Suarez of Euro Pacific Capital. Please go ahead.

Hey, Greg, good morning and thanks for taking my questions here.

Hey Mark, good morning.

Just to go back on the extension of the JV and if you think about this strategically and take a long term, how should we think about capital deployment, would it be mostly take place within the JV in form of addition in new building sort of the post panamax segment consistent with your sort of latest transactions or you think there is room for additional secondhand acquisitions outside of the JV given your recent preferred offering here out of 96.6 million I think what’s net proceeds. How should I think of that?

Look, it’s - through the JV with then ten buildings which is the part of - the main part of our investment but there we have also bought together the all four secondhand ships, older and with small assets, it’s however today they are all in the money. So we are going to be looking together with York if there is an exclusive within over this new sort of over this extended investment period. We’re going to be looking together with York for new buildings, as well vessels, we don’t have preference as look at the numbers make sense. And as long as those are investments where we have manage to satisfy our downside concerns. And we feel that there may be some upside left. So the long story short, we look at everything, there is - the same way we have been doing for Costamare. And I am afraid that I am not saying now what’s going to be the next transaction, but we both York and ourselves say feel that there is another opportunities going forward, otherwise we wouldn’t bother including into this extension agreement.

Gotcha. And you also talked about numbers, you know I remember when you went into these agreement you were talking, you were like to target transactions when ROI of in the teams range if you will. I am wondering if those benchmark or ROI benchmarks have changed that also is extending this the JV agreement, how should we think about reasonable ROIs when you are looking at transactions whether it’s secondhand or new builds?

I think when we look at transaction, the first thing is what is the risk we and our shareholders are assuming consequently also the York investors are assuming what is our sort of equity value at risk. As all that we are happy with that and there is some upside as well we are going to proceed but first we try to make sure that we cover out downside protection. So I am not prepared now to discussing detail target levels for our cash on cash at our target levels, because either transaction is not properly structured or if you don’t have a credit loss at charterer or if the financing cannot be obtained, there is greater downside risk without any meaningful upside with respect of what our target is.

Gotcha. And I guess similar to that question, I am wondering if we assume that the financing will be in place for specifically five 11,000 TEUs, do you guys have an optimal sort of target loan to asset ratio if you will, I know that in the past you have been in this 70s and 80. I am assuming everything goes through. Would that be a fair assessment, a fair assumption going forward?

I’ll tell you, look the loan to value each is one way to measure leverage. The first thing we look at is the cash flows of the project on a standalone basis. Look as the cash flows of the project can easily meet the debt service requirements then of course we are going to go for the higher - for the highest possible leverage assuming that the chatter party - that the chatter is going to award entity. In order to maximize our equity interest but so where is going to 60, 70, 75 whatever, it all depends on the cash flows of the project and what battle we have in order to meet the great the service schedule. If the cash flows of the project on a standalone basis until when we have a bunch of ship sit together in the same transaction, they don’t satisfy the cash flow in inch of the deck. Then of course we are not going to proceed, so the leverage something relevant.

Okay, fair enough. Well, thanks for your time as always Greg.

Well, thank you. Thanks a lot.

Our next question comes from Charles Rupinski of Global Hunter. Please go ahead.

Hello Greg, thanks for taking my question.

Hi Charles good morning.

Most of my questions have been answered, but I am curious about just maybe what you are hearing from the liner companies in terms of the larger ships, the 10,000 to 14,000 TEU ships which you have on order, there are also ships coming online, vessels that are larger 18,000, 20,2000 TEU. Can you maybe talk a bit about how these are going to be potentially deployed over the next cycle and whether you would be open to going even larger vessels in terms of what you are looking at? Thank you.

Okay, look the larger vessel, I mean first of all containership and you told about the economies of scale. And if you see historically, the average size of the containership vessel over the last ten or even 15 year, say you would see that we started from 2000 to use and now is the region of and now that’s in the range of 2,800 the used vessel and this size has been gradually growing every single year over the last ten, 15 years. It’s all - I’d say it’s all about the economies of scale and to tell about the cost per slot which assuming the minimum utilization is decreasing. Now the larger vessels, I think it’s that they are going to be used as far as Europe trade. And liner companies have held that’s have sort of entered into alliances, they need no ships. From our side, we have been - at Costamare together with York, we have been pretty flexible. We have been buying some orders ships, we have been putting an order for everything for incidence. For 2,000 TEU ships as long as the numbers work and as long as liner companies say need those ships and our downside risk with which we feel comfortable. And there is also financing for those vessels, then we are pretty flexible. Technically you know we can manage and operate over the last containerships as well as 25 or 30 year old 1,000 TEU vessels. So it’s all about potential iterance and we told about covering our downside risks.

Great. Thanks for the time, Greg and congrats on good quarter.

Sure, thank you.

And our next question comes from Shawn Collins of Bank of America. Please go ahead.

Great, thanks. Good morning, good afternoon, Greg. How are you?

Yeah, thanks Shawn, good morning.

Thanks. Hey Greg, there has been some press on raising taxes on ship owners increased or potential change to the special tax status to Greek ship owners. I know this is not at the corporate level but instead at the level of dividends or profits to Greek ship owners. Can you just provide some clarification if my understanding is correct and if there is any color paid on this?

Yeah, look, as you rightly said that there are taxes both in corporate level and there are taxes from personal level which mainly have to do with dividends. Now on corporate level because, Costamare Inc. like other shipping companies minus out of agree say we have been too much tax which is based only the national standards. And although there is no specific tax expense line in our P&L, this is included in our operating expenses. So tax is being paid by Greek ship owners along the line of international standards. Now regarding taxation on dividends, I wouldn’t like to enter into a discussion now, this - since this is something recently brought out, when this is something that we don’t have any specific guidelines yet. But this in any case, I am not sure how this would be affecting Costamare Inc. assuming that the common stocks we have now paying which is part of our operating expenses remains unaffected. So let us have a bit more clear picture about the tax treatment on dividends and then we would be more than half way to revisit and discuss with you in more detail.

Okay, great, that’s helpful. I appreciate that. Just as a second question, a quick one on, you raised 100 million of - I think was 100 million of preferred equity in May, can you just remind me of the terms and then more specifically, more importantly why you chose the preferred rather than say the bank market or the bond market or some other type of structured alternative?

Yeah, well, this preferred is it is through that our equity from accounting - from an accounting point of view on the U.S. GAAP. And think there should treated as asset because it is too perpetual meaning that in case you don’t repay after five, seven, ten years whatever there are no step up by provision. So it’s not a debt hybrid, it is a pure equity instrument now. We have been no code obligation over the first five years meaning that we cannot repay over the first five years and after year five, we are at liberty to repay this 100,000 of par either partly or in total, however we decide to do. It’s - the dividend, it is eight and three quarters. And as I said, it is too perpetual now. This is an addition of a financing tool on our balance sheet. And this is therefore for our corporate purposes in order to raise debt, first of all we don’t want to come close our financial covenants regarding debt and to have to specific assets in place. This is for future transaction, this could be used for new building, say this sort of pay could be used for secondhand shops where we don’t have a long term target partly get in place. And you know we can deliver this asset later. This is going to be used for a lot of reason, it’s very flexible and we feel that this is a good addition in our capital structure. We have commission by debt, we have done financial lease if we sell lease transactions. We haven’t done any corporate bonds simple because we found them to be extremely expensive compared to commercial bank debt and very restrict if they compare to terms regarding their financial governance which you can obtain from commercial back say today. We haven’t raised equity, pure equity common first of all because we don’t need it and secondly it would have been diluted with our current shareholders to the common shareholders. So this is an additional so for [indiscernible] which we feel make sense.

Okay, that’s great, that’s helpful, very comprehensive. Thank you very much, Greg. Thank you for the time and the information.

Thank you.

[Operator Instructions] Showing no further questions, I would like to pass the floor back over to Mr. Zikos for his closing remarks.

Thank you. Thank you very much for being here with us today. We are looking forward to speaking again to you during our next quarter’s call. Thank you.