Costamare Inc. (CMRE) Q4 2015 Earnings Report, Transcript and Summary

Thank you for standing by ladies and gentlemen. And welcome to the Costamare, Inc. Conference Call on the Fourth Quarter of 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 Thursday, January 28, 2016. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read Slide number 2 of your 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. 2015 presented another profitable year for the company. In December, we arranged pre-delivery financing with a leading Chinese financial institution for the two 3,800 TEU container vessels which are scheduled for delivery in the first and second quarters of 2018. Upon delivery, the vessels will commence a 7-year charter with Hamburg Sud. Regarding the market, charter rates and asset values have been under pressure, especially during the second half of the year, as a result of weak demand. We believe that today's depressed asset value environment provides attractive opportunities and the potential to increase our shareholders' returns. Moving now to the slide presentation. On Slide 3, we are providing a summary of the recent developments. Firstly, on January 4, we declared a dividend for the fourth quarter of last year. This is $0.29 per share and it is payable on February 4th. We have also declared a dividend on our B, C and D series of preferred stock. In December, we closed the financing of the two 3,800 TEU vessels chartered with Hamburg Sud. The financing was arranged on pre-delivery basis, with a leading Chinese bank. Finally, we disposed a 1986 built, 2,500 TEU container vessel on which we booked an accounting gain of approximately $1.7 million. On Slide 4, we are providing a summary of the chartering arrangements which took place during the quarter. On Slide 5, you can see the fourth quarter 2015 results, as well as the same period of last year. During the fourth quarter of 2015, the company generated revenues of $122 million, EBITDA of $88 million and net income of $33 million. For the same period of last year, the revenues amounted to $121 million and the EBITDA and net income to $81 million and $28 million, respectively. Consistent with our previous press releases, we feel that the EBITDA and net income figures need to be adjusted for the following non-cash and one-time items, the accrued charter revenues, the gains or losses from vessel disposals, the gains or losses resulting from derivatives, the amortization of prepaid lease rentals which is a non cash charge, and the non-cash G&A expenses. Based on the above, the fourth quarter EPS amounts to $0.44 and the fourth quarter EBITDA amounts to $86 million versus $0.41 and $83 million the year before. On Slide 6, we are showing the revenue contribution for our fleet. 99% of our contracted cash comes from first class charterers like MSC, Evergreen, Maersk, Cosco, Hamburg Sud and Hapag-Llyod. We have close to $2 billion in contracted revenues and the remaining time charter duration of about four years. I think that Slide 7 speaks for itself. You can see the resilience of our business model. The bars are the revenues and the EBITDA since 2007 and the dotted line is a time charter index. As you can see in a cyclical industry and the speculative market movements, the company has been consistently performing based on its long-term contracted cash flows, with top charters. On Slide 8, you can see our remaining CapEx commitments. As you will notice, these are rather minimal for a company we have got on balance sheet of $160 million and debt free assets. Remaining CapEx commitments for the two 3,800 TEU ships are in total $3 million, and $19 million for the five 14,000 TEU vessels. Regarding the 11,000 TEU ships we have up to now paid all the pre-delivery installments of 50% and the remaining 50% is to be paid upon delivery. We're currently in discussion with commercial banks regarding the financing of the delivery installment of 50% for those ships. Apart from the above there are no other outstanding commitments. Slide 9 deals with the ships coming out of charter during 2016. As you can see most of those vessels have been chartered in a low value environment which means that the re-chartering does not actually pose a significant risk. Most importantly if you go to the next slide, Slide 10 this shows a sensitivity analysis we ran on the revenue basis for 2016. As you see, even if we assume a 50% or 70% discount on the new charter rates entered into during the year, vessels that currently exist, the difference on the revenue basis is between 4% to 6%. We have above 75% charter covers for 2016 but more importantly only 6% of the total fleet TEUs are panamax vessels opening during the year. On the last slide we're describing the market. Charter rates and asset values have been under pressure. The amount of idle fleets has come up and it is close to 7%. The order book remains at levels of around 20%. As we have mentioned in the past we are well positioned to continue to grow in such an environment which definitely provides opportunities. This concludes our presentation and we can now take questions. Thank you. Operator we can take questions now.

Thank you very much. [Operator Instructions]. And our first question comes from the line of Ben Mullen from Stifel, please go ahead.

Hi, this is Stephen Pittsworth in for Ben Mullen. I just had a question about your 11,000 TEU vessels. If you can't find long term charter rates that meet your return requirements we're wondering could you give us an idea on the type of market you're seeing right now for the structured rate fill type of vessels.

Okay. The market right now is not very liquid for those vessels, and it depends on how you define the short, medium or long term. If you cannot think we can find if we want a long term time charter coverage, however the numbers, we're going to be locking and driving this for the next 5, 7, 10 years, may not be satisfactory. So it would feel that this is something that doesn't make sense. We may well decide to go for a shorter period and this can be anywhere between like six months, one year, two to three years. So you know as mentioned we have already paid 50% of equity on those vessels. This means that if we don't secure a long term time charter coverage because we decide not to based on today's market conditions, we can very well have a 50% leverage which is something definitely manageable. And we will have flexibility and we definitely want to retain our flexibility to go for a shorter period, depending on the market rate we will negotiate and agree with our partner.

So are you seeing demand for those short term charters from charterers?

There is demand. There are discussions and there are discussions that have been going on as we speak now. I'm not in a position to be more specific for obvious reasons, because there are negotiations you know currently. But because we have also been asked in the past regarding the benefits of that project and those 11,000 TEUs we feel extremely comfortable with our chartering potential and with the project returns in the medium and long term horizon. And especially after the opening of the Panama Canal we definitely feel that those 11,000 TEU vessels would be in great need there from all the clients.

Okay, perfect, thank you. Then my next question goes back to the age of your fleet. I was wondering, can you expect to see more scrapping from the fleet that's a little older rather than putting those vessels through a special survey?

Look, it depends on the physical condition of the vessel and also it depends on the market. Generally as a company we tend to keep vessels whose physical condition is still acceptable, you know up to the age of 25, 30 or in the past we were also taking vessels which were above 30 years old and those were assets fully depreciated in our books. So it depends on the market and on the physical condition of the vessel, but as long as we can find a charter which we feel makes sense, it’s definitely above breakeven levels, and we feel comfortable with the quality of the vessel, we may very well continue driving those assets.

Does the requirement, the new requirements for the ballast water treatment plants change that dynamic at all?

No. In our case, it's not something that I think is going to be changing neither our business model, nor our decision on whether we're going to be keeping the vessel driving for a longer or a shorter period. I wouldn't say that.

Okay. That does it for me. Thank you very much for your time.

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

Hi, Greg and thank you. Greg, can you give us a little bit of another view of your liquidity? I think that there are lots of concerns for every shipping company about the liquidity position. You have about kind of $160 million of cash but at the same time there have been some CapEx that you've mentioned. How much cash can you grow from the three assets and another 11 vessels that you have?

Yes. Look, there may be questions about the liquidity generally in shipping for obvious reasons but I don't think that there should be a concern regarding for some of them. And let me just add a point this year that in the past, we've seen reports from people who have definitely miscalculated our liquidity position. Now to be more specific, as of year-end we had cash on balances of $163 million. At the same time we would expect based on the compliance efficacies we're going to be providing our lenders with which is our obligation as per our loan agreements, to have a leverage ratio in the region of a 55% to 57% around those numbers. And if you look at the last pages of our press release at the Costamare, Inc. ledgers we have seven ships which are debt free, without counting the three vessels that we sort of own together with York. So from a leverage perspective I think, we are at a relatively comfortable level, I would say. We have debt free assets and we also have ships that should we wish, we can lever them up or we can take some of that on existing vessels. Now we are not going through specific numbers per vessel because we don't have anything today and we haven't signed any new loan agreements, probably we wouldn't be doing this now because there is no need but if you want a point of reference, I think that at this point, we could raise cash of close to $100 million, if not more than that, simply by leveraging those three assets or ships with low leverage. Now, regarding the CapEx commitments and -- because there was in the past some confusion on that as well and this is the reason we have avoided this slide, for the 3,500 TEU newbuildings, we have recently arranged financing. The Costamare portion of remaining CapEx commitments for those two vessels, it is in total $3 million. For the five 14,000 TEU, the remaining CapEx commitments for the Costamare portion, it is $19 million, so in total we took about $22 million. And for the 11,000 TEUs, we have paid 50% of the delivery cost of amount, the remaining 50% we're currently in discussions with banks for our own 50% sort of leverage on those vessels, without assuring any upside from future chartering, et cetera. So I think that our CapEx commitments today, for the size of the company and considering its liquidity position are quite manageable.

And can you also talk to us about the refinancings, if you have some credit facilities? They're maturing in 2018, have you started discussions about extending this credit facilities and how much debt you expect after you paying debt, will you be able to refinance them in full or you're going to need some of your liquidity?

Look, 2018, we talk about two and half years ahead and how much debt can be refinanced or not, is also a function of the value of those assets at this point in time. However, I'm sure people have noticed that we're confident, which is repaying this debt quite prudently and so this year our debt repayment obligations are twice our depreciation expense. So, we do have debt repayments due in 2018. There is a one facility which is maturing at this point. However, this facility, has like 17 ships as collateral and those vessels will be debt free. So taking into account the volume and the expected value of those vessels, this is not something with which today we feel uncomfortable. Being proactive we may start discussions in advance and we may not wait until mid of 2018 to refinance this facility, but bear in mind that is a good 17 vessels, this is something which we feel relatively comfortable today. And let me predict that sort of our liquidity and track record is something that Costamare's initiative of more than two years, we've never not even restructured facilities. We have never even breached a single financial covenant not even in 2009. So we feel quite comfortable regarding our debt arrangements.

Thank you, Greg. And can you talk to us about your investment strategy or capital allocation? You mentioned that you have over $100 million incremental debt capacity liquidity than your cash position and you made reference of a potential acquisition opportunity in the current weak markets. And my question has to do, where do you see these opportunities? What type of transactions? And whether given your stock trading at 17% yield, whether share buyback or a preferred share buyback would be part of our plans?

Look we are quite open to a lot of things including the share buybacks, and the preferred buybacks. But we are a shipping company and traditionally in shipping we are better off, if you buy and charter at the low of the market like the market we are experiencing today, and wait, be patient, especially in container shipping in order to generate some returns over the coming years. So we do see opportunities especially in the second hand market. In the second hand vessels, if you look at what we have been doing in the past, we have been buying mainly ships which may be at the age of 10, 12, 15, 17 years old, with or without charter and buy them with equity and we tend to lever the vessel at a later stage when we have a longer time charter employment. So we could be doing transactions like that. We can also be looking at new business transactions similar to the one we did over the last couple of months. So I think we are quite flexible but it's definitely the market environment today. It's probably the lowest market we've seen since 2010. So I think that there are opportunities as long as the company has sort of -- a player has liquidity and have the sufficient size in order to weather the storm.

And one last question, if you can talk to us about your outlook about the market, the market demand last year grew by around 1.5% and the supply grew by 8% and it seems that we're going to have 4% to 5% supply growth this year. When do you see that -- how long do you think that is going to take for the market for rates to start moving up again given the current over supply and the idle capacity that exists in the market? And based on this outlook, how do you view your dividend distribution policy the next few years?

Look regarding the market, I'm afraid it's our policy that we never forecast the market. We may have a view but every single transaction we enter into is based on its -- or it’s based on the numbers and what is our equity at least. Now you're right that demand has been pretty flat or you know with a very low increase in demand during 2015. We didn't have a lot of scrapping during the year, it was like a bit less than the 200,000 TEUs scrapped. I'm not sure that I can forecast when we're going to see the market rebounding or when we're going to see box rates picking up. However let me remind you that the fourth quarter in container shipping, the fourth quarter is historically the less strong or the weakest quarter of the year and on the other hand we have a down market in container shipping which goes for I would say six, seven years. And so this is a cyclical industry and at some point it would definitely have to turn. But I'm afraid that I cannot predict a specific point in time that this would happen. Now regarding the dividend and capital allocation, first of all regarding the dividend I have to remind that we have close to $3 billion of contracted revenues and we have a remaining time charter duration of close to four years. Now the dividend it is something that it's been decided by the Board and there is a balance and fine line between dividends and return on capital on the one hand and on the other hand about growth opportunities. We like dividends, I have to remind you that the current family owns 65% of this company. So it is a substantial recipient of those dividends. On the other hand as I said there is a balance between growth and also return of capital which the Board is evaluating every quarter.

Okay. Thank you very much, Greg.

[Operator Instructions] Our next question comes from Brandon Oglenski of Barclays. Please go ahead.

Good morning or good afternoon, thanks for getting us on the call here. I want to follow up on the liquidity discussion. I mean, if the market remains down as much as it is, what is the strategy for the fleet? Do you think that you'd be in a net reduction mode or would you be looking to utilize the capital that you do have available to get a little bit more aggressive on expansion? What should investors be thinking is the priority?

Look, first of all regarding liquidity, we have a slide, which shows that the vessels coming out of charter in 2016. Even if the three charters at a 70% discount based on today's picture which means that if today they get $10, next year they will be getting $3, you can see that the delta in our revenues, is sort of in the region of 6%. And this is because the backbone of the fleet is chartered out for a long period and we've ships coming out of charter in 2016 and we should have because when you have started maturity. But those ships most of them have been involved in a low market and have been chartered at rates which are not very far away from today's market. Now going forward, of course, if we continue having a market like that, there are opportunities, we will definitely consider them because that's our -- it is our business and this is what Costamare traditionally has been doing. No, it doesn't mean that because there is a down market and because we may have liquidity at relatively low levels, we're going to go out and buy what there is available. We will be not be selective but definitely if there are opportunities, I think it's our responsibility to have a very close look at those,

Okay. But I guess what I'm getting at is, would that take priority over the dividend?

Well, it will have to be such opportunities which together with leverage, they should be huge or they should be big enough so that, we cannot sustain the dividend. Up till now for the last five years, we never had to cut the dividend or to reduce the dividend in order to grow. On the contrary over the last three years we have raised the dividends three times and when Costamare then probably had 41 ships and now we are with a total of 72 vessels, including the newbuildings. So, as I said that this is a Board decision but we like dividend, same way we like growth. I'm afraid, I cannot give you a specific answer now because we don't know what the opportunities will be, but I can tell you that regarding the dividend, this is something we definitely care about the dividend, it's a sustainability in this growth moving forward.

Okay. And you talked about leverage in the form of debt to your total capitalization, but markets are quite volatile right now. So look Wall Street can be fickle. But from I think an investor perspective, we'd be worried now that lending spreads could go way up and not only that banks might start looking at asset size and say, is that really the right way to measure leverage right now. Do you feel that you're going to hit some more constraints in the financing market here? I mean are costs going to go up considerably or do you feel that this is still an asset class that can be relatively cheaply financed?

Look, regarding banks and asset values and covenants that was part of the question. The way our leverage is being calculated, there is a predefined formula which we apply. We cannot change it because we're in a down market. They say we didn't change it, when we had a better market for instance the first half of 2011. So there is a predetermined formula which doesn't change and investors, if they don't want to spend time on going through how to calculate our leverage and our bank loans, they can also look at our EBITDA covenants, which is like EBITDA over net interest which is more than 3 times or need a calculation regarding our leverage is that if someone takes the next 12 months debt through sort of EBITDA, it's less than that also. But it's close to 4 times which in today's environment for a shipping company, I would say, is pretty low. So, I think that from a leverage perspective and covenant wise we feel extremely comfortable. Now as I said there are opportunities and probably there will be more based on where the market is shaping at least for next quarter and we definitely are looking at those. Some may materialize, some may not. But we don't have to grow just for the sake of growing. If it's something that makes sense today we will definitely do it and up to now we have been able to secure debt, both commercial bank debt, all sort of debt in the form of leased [indiscernible]. So commercial bank debt is still available for companies and for projects that attract us the right way.

Okay, thanks guys.

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

So Greg, in the quarter, I know you sold a ship. You sold the Challenger for $5 million for the use of demolition, which makes sense to us. I just wanted to ask how that negotiation went and what the appetite in the market looks like for demolition? Thank you.

Look, this was all for demolition and there is appetite, the question is the price. So I mean scrapper price is now -- are not where they used to be, they're now in the region of you can say between $280 and $300, versus four or five times that we used to see in the past. But still the appetite is there. It is a matter of price. Now for this specific vessel it is, it was a 1986 built ship so this was like close to 30 years old. It is a ship that had already sort of had its equity invested more than one time. So we felt that this was the right approach. So for demolition there is a market, it's just that the scrap prices are at levels which are close to $280 to $300 per ton.

Okay, understand. Thank you. And then just a second question, a general question on your capital commitments. And I know you've covered this quite a bit, so I don't want to overdo it. And you have laid out your capital commitments pretty clearly. And it looks to me like you have a very strong liquidity position. But as you pursue discussions with the commercial banks on the financing for the 50% of the $86 million obligation on the 11,000 TEU ships, I know you cannot comment specifically. It wouldn't make any sense. But I wanted to ask what the tone and the message is that you are getting from the commercial banks, especially given the current soft shipping environment and the somewhat uncertain economic environment. Just wondering, how the banks sound to you relative to your past dealings with them? Thank you.

Look I think it's we took about 50% leverage on ships that have been ordered at prices which are not the high prices for this type of vessels. So there are banks and there is another banks who are more than willing to put sort of part of their balance sheets on these deals and I feel it makes sense. You talk about a 50% leverage and for ships that in the past they might be ordered for values of above $100 million or so. So it's not something that would make sense, at the same time if you have sponsors with size and track record then again it makes even more sense. So there is appetite on behalf of the banks for this specific project. If there was not, simply we wouldn’t have put it in our presentation.

Understand. That's helpful. That's great. Thanks for the time and insight Greg. That's all for me.

And our next question comes from Charles Rupinski of Seaport Global, please go ahead.

Hi Greg. I'm sorry I didn't get off the queue. My questions definitely have been answered. A very thorough overview. Thank you.

[Operator Instructions] Seeing no further questions, I’d like to turn the conference back over to Mr. Zikos for any final remarks.

Thank you. Thank you very much for being here with us today. We're looking forward to speaking to you during our first quarter 2016 results, thank you.