Costamare Inc. (CMRE) Q2 2016 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 of 2016 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 call is being recorded today, Thursday, July 28, 2016. We would like to remind you that this conference contains forward-looking statements. Please take a moment to read slide number 2 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 second quarter, the Company continued to deliver solid and profitable results. Regarding new financings, we have secured funding for the first two 11,000 TEU new buildings, minimizing our remaining capital commitments, and we have entered into new debt transactions financing debt free and refinancing existing assets on competitive terms. On the chartering side, we continue to employ our vessels at favorable rates, despite adverse market conditions having chartered in total eight ships operating during the last three months. Regarding our new building program, we have accepted delivery as per schedule of the first two out of the five 14,000 TEU vessels, which have commenced their 10-year charter. Finally, we put together a dividend reinvestment plan available to all common holders. As a long-term committed shareholder of the founding family, currently controlling an interest of about 65% have decided to reinvest in full the second-quarter cash dividends. In a challenging market environment, I remain bullish to preserve liquidity and strengthen our balance sheet. Going forward, the board will continue reviewing our dividend policy based on market conditions and direct liquidity requirements. Moving now to the slide presentation, on slide 3, we sold a number of financings we completed over the last quarter. These are the financing of the Navarino for five years, the financing of the first two 11,000 TEU new buildings, and the refinance of an existing facility of the vessels MSE office at [indiscernible]. The total amount raised for this transaction was about $150 million. On slide 4, we are providing a summary of the new building deliveries and the chartering arrangements which took place during the quarter. We chartered in total eight ships over the last three months at rates which compare favorably to current market conditions. On slide 5, we discussed the second-quarter dividends and the establishment of the dividend’s reinvestment plan. Also, I should mention the founding family has decided to invest all the second-quarter cash dividends in new shares. On slide 6, here you can see the second-quarter 2016 results versus the same period of last year. During the second quarter of this year, the Company generated revenues of $120 million, EBITDA of $83 million, and net income of $32 million. For the same period of last year, the revenues amounted to $123 million and the EBITDA and net income to $92 million and $40 million respectively. Consistent with our previous leases, we feel that the EBITDA and net income figures need to be adjusted for the following non-cash items: the accrued charter revenues, the gains and losses resulting from derivatives, the amortization of the pre-paid lease rentals, which is non-cash charge and the non-cash G&A expenses. Based on the above, the second-quarter EPS amounts to $0.42. As I said per quarter, EBITDA amounts to $84 million, vessels $0.46 at $87 million the year before. On slide 7, we are showing the revenue contribution for our fleet. As you can see, close to 99% of our productive cash, cash profits the charters like MSC, Evergreen, Maersk, Cosco, Hanjin Subic and Hapag Lloyd. We have $1.7 billion in contracted revenues and the remaining time charter duration of about 3.5 years. Slide 8, this slide speaks for itself. You can see the resilience of our business model. The barges are the revenues and the EBITDA since 2007, and the dotted line is a time charter index. In a cyclical industry and respective of market movements, the Company has been consistently performing based on these long-term contracted cash flows with top charterers. On slide 9, you can see our remaining CapEx commitments. As you will notice, these are rather minimal for a company with cash unbalances of close to $150 million and debt-free assets. The remaining CapEx commitments for the two 3800 TEU shifts are in total $3 million and $11 million for the three remaining 14,000 TEU vessels. Regarding the five 11,000 TEU ships, we have up to now paid 50% of the total installments with equity, and we expect to finance the remaining 50% with debt. We have already secured predelivery financing for the first two 11,000 TEU vessels. Apart from the above, there are no other unfunded commitments. Slide 10, this was a ship coming out of charter for the last two quarters of this year. As you can see, most of the vessels have been chartered in a low value environment, which means that the rechartering does not actually pose a significant risk. If you go to the next slide, slide 11 is an update of a similar slide we used in the past. It is a sensitivity analysis on the effect of the rechartering. As you can see, even if we assume a 50% or 75% discount on the new charter rate entered into due the remaining of this year, vessels current fixtures, the difference on a revenue basis is between 2% to 3%. We have close to 76% charter coverage for the remaining of 2016. And moving to the last slide – this is slide 12 – here we discussed the markets. As already mentioned, charter rates and values have been under pressure. The number of idle ships has come down to 4.6%, and the order book starts out 17.5%. As we have mentioned in the past, we are well-positioned to continue to grow in such an environment, which provides for opportunities. This concludes our presentation, and we can now take questions. Thank you. Operator, we can take questions now.

[Operator Instructions] Our first question comes from the line of Ben Nolan from Stifel. Please go ahead.

Thanks. Hey, Greg, my first question relates to – you have obviously done a number of refinancings and new bank facilities, which is good. Just curious, how far you are in the process of the normal refinancing of your term debt and how much more of that there is to do between now and the end of the year? So – and, ultimately, what that means with respect to a normalized run rate on your debt amortization schedule.

Yes. We are in discussions with the commercial banks regarding existing loan facilities, which are maturing, mainly in 2018, because we have already refinance loans to $40 million, a balloon which, you know, it is maturing in 2017. So this is still a work in progress. I cannot say much more at this point in time. Hopefully, this is going to be something that we can discuss in the next quarterly results call.

Okay. And then my next – and this will be my last question – relates to the joint venture with your capital. Obviously, I know you guys are hopeful to put those remaining new buildings on contract, and so I would expect that is the first priority. But, ultimately, given where you are and now the MLP option at least doesn’t appear to be on the table, how are you thinking about that joint venture going forward? Is that just you continue the status quo, or is that something that you might pull in entirely or spin off or just curious where your thinking is with respect to that position?

Yes. The short answer is that we continue to establish [indiscernible] that initially this joint venture was put together in 2015, and initially we had the two-year investment period, meaning from May 2013 until May 2015. We have extended this investment period for five more years, which now goes up until May 2020. So we still have a sufficient amount of time to go. There is appetite from both parties, so this is an excellent relationship. So I think nothing has changed. We still have quite some time until the expiry of our agreed investment period.

Okay. Very good. That does it for me. Thanks.

Okay. Thank you, Ben.

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

Yes. Hi, Greg. I want to ask you about your view of the overall market, and what do you think is going on right now in terms of charter rates and freight rates? There are certain concerns about the profitability of the liner companies. Have you seen any efforts of liner companies renegotiating existing charters, or we simply see delivering vessels already under contract?

Yes. This is more than a couple of questions. Let me take, the first part is that, as far as we’re concerned, from our side, from our charters, we have not seen any type of renegotiations, not at all, and we have a pie chart with our charters today comprising our contracted cash flow. We feel extremely comfortable with the status and the quality. So the short answer is that there are no discussions about renegotiations, neither on the charter nor on the tenor of the existing charter parties. And this is not something we expect to happen sort of later. Now, regarding the market, we will witness a lot of pressure in charter rates, especially for the Panamax vessels, which is something that we all expected due to the opening of the Panama Canal. Those vessels today are becoming obsolete and container shippings about the qualities of scale, and as expected, those ships are being substituted by larger vessels. The last also – the last weeks, we have seen this slide increase in charter rates for the bigger vessels. Still, however, we are nowhere close to historical charter rates for ships of 9,000 or 10,000 TEUs. The market is at historically low levels overall. This is a prolonged downturn, and, again, it is not surprising that we have seen scrapping picking up. There are a lot of estimates about how many TEUs are going to be scrapped this year, but I think it is going to be – not above the scrapping levels we saw the year before.

Thank you, Greg. And I want to ask about your outlook and how you consider the capital allocation strategy of the Company, given this outlook. You mentioned that we are going through a prolonged downturn, but at the same time, you have taken some measures to increase your liquidity. Families are willing to take shares that helps significantly the liquidity of the Company. Is there a point that Costamare is considering buying vessels – I am talking about the next couple of quarters – or you are just waiting to see how the market will develop first? And if there is a sudden interest in acquiring the current weakness more assets, would you going to be focusing on larger vessels, or you think about there could be a possibility of an opportunity to buy Panamax type vessels which are the most hardly hit vessels in the entire market right now?

Generally, we are active. We look at opportunities. Whether it is six weeks or without charters – I mean, secondhand vessels with or without charter. There is a not a lot of new building activity today, or there have not been any substantial new building orders since the beginning of that year. So, in the secondhand market, which is radically more active, we look at opportunities, smaller or bigger smaller or bigger vessels, younger or slightly older with or without charter. We are generally flexible. It is only a matter of price and how comfortable we feel with a specific asset class. Now, regarding the Panamax vessels, which, as you mentioned, they have been hardly hit, I am not sure that there are great prospects for these type of assets. So I am not sure that bearing in mind where the market is today, whether this is something that we would consider. As you can see, in our fleet, we don’t have a lot of Panamaxes. Those that we have, those are ships that have already been chartered for quite some time, so they have been more or less been put back. Otherwise, in the total of 72 vessels we have today, together with the new buildings, the portion of the Panamax vessels is quite small. For this specific reason, because we felt that this is an asset class, that at some point we would be becoming obsolete.

Thank you, Greg. And then one last question, there are a lot of concerns in the overall shipping market across all the sectors about asset values. Asset values, they happen to have declined both in tankers and bulkers, as well as in containerships. The problem with the containership market seems to be that it is very hard to determine what the value of these vessels are and how to determine them. Can you remind us where do you stand on your covenants with your companies, with your lenders, and if there are any issues with the covenants, how do you calculate the covenants given the lack of liquidity and asset values?

Yes. First of all, regarding our financial covenants, I guess you are referring to financial covenants that have to do with leverage, mainly. The leverage – the value of the asset is calculated based on whatever you have agreed with the lender. In our case, first of all, we have no problem at all today with all of our financial covenants or the covenants are made whether it is leverage related or whether these are cash flow related. For instance, we also have an EBITDA with a net interest covenant. So we have no issue at all with our financial covenants. And in container shipping, when you have long-term charters, in a business more than like ours, we feel that it makes sense that the value of the asset should also include the value of the charter as long as you have minimal long-term charter employment. So now we are in agreements. We have a charter inclusive valuation, which, of course, is to some extent subject to the charter fleet value fluctuations. However, the value of the customers cash flows is also a component of our own ship valuation. So in that respect, we feel that this is the proper way to manage a containership vessel which has a charter with a credible charterer. And this is how we are dealing with our financial covenants, and we have no problem at all with meeting our covenants today.

Thank you, Greg.

Thank you.

[Operator Instructions] Our next question comes from David Starkey of Morgan Stanley. Please go ahead.

Hi guys. Can you tell us – I know the family owns about 65% of the Company – what portion of that is in common stock versus the preferreds?

The 65% it is all common.

It is all common stock. So if there was a dividend cut, it would certainly affect the family, right?

I think they own 65%.

Okay. Thank you.

Sure.

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

Hi. This is Eric Morgan on for Brandon. I was just wondering if you could elaborate a bit more on the rationale for the dividend reinvestment plan, just following up on the prior question, maybe as opposed to cutting the dividend?

Yes. Well, this is something which, first of all, it is not uncommon, and we are not the first shipping company that has it in place. However, when you have the sponsoring family or the sponsors of which they own close to 65% participating for this quarter, for instance, in this plan, it makes it meaningful. At the same time, we feel that this is a strong sign of belief and trust in the Company’s prospects.

Okay. And did you say that they had – the founding family had decided to reinvest just the Q2 dividend, or is that something that you would expect kind of going forward?

No. For the second quarter beginning of July, we declared the second-quarter dividend, which is $0.29 per share per quarter, I mean unchanged from the previous quarters. For the second quarter, for this declared dividend, the founding family has decided to invest all the cash they would receive by owning 55% of the common stock in new shares.

Okay. Appreciate it.

Thank you.

[Operator Instructions] Our next question comes from Mark Suarez from McQuilling Holdings. Please go ahead.

Hey guys. Greg, thanks for taking my question.

Yes.

Just to go back on distressed opportunities, I know that there has been a lot of talks on some of the liner companies going into financial distress. We have seen a lot of companies – not you guys but other competitors – now that are sort of trying to start their renegotiation talks. Have you seen more inbound calls going after you in terms of interesting acquisitions for either specific assets outside of the Panamax sector or even companies that are looking to dispose of those assets?

Yes, there is general activity for secondhand assets, whether they come from financial institutions or whether they come from other owners, or there are some transactions that have to do with selling these back with liner companies. This is something we generally look at. At the same time, we have to be selective, and we have to use our equity as efficiently as we can, especially in today’s environment. So there are opportunities, yes. We look at them, but we are not going to be doing transactions just for the sake of growing. I mean, only if we feel that it makes sense for us and for our partners [indiscernible]

Okay. And then maybe a housekeeping question on the balance sheet. I know you have been refinancing. I know you talked about maybe greater details on the next quarter. But, as of now, as you look at to your balance sheet, do you have an updated amortization schedule that you can maybe guide us on in terms of a reasonable run rate?

Yes. This is – I mean, I have to refer you to our annual report, our basically very detailed debit payment schedule there. We have done some refinancing or we have financed whatever balloons were for 2017. And for the refinancing of 2018 and onwards, this is something we are currently looking at. But, for 2016, for the remainder of 2016 and for 2017, all the balloons that were there have been already financed.

Okay. Great. And then, finally, on the capital commitments regarding the purchases in New York and the new builds, do you have a breakdown on a quarterly basis in 2016 and 2017? I mean, we can do this offline, I guess, but I’m wondering if you have that.

Yes. For 20 – we have slide 9, which I hope it is helpful. If you look at slide 9, the two 3,800 TEU ships, those are going to be delivered in the first or second quarter of 2018. So the total of the $3 million, I mean, this is a very small capital commitment. It is expected to be out during the first two quarters of the year. And then, for the three 14,000 TEU ships with the remaining CapEx commitment for the Costamare portion is in total $11.4 million. We talk about September and October 2016, actually.

Okay.

And, yes, so I think this is pretty much it. And then for the 11,000 TEUs, the first two, we have funded them, so I mean there is no expected cash outflow there for our equity portion. And then, the next two are going to be delivered in the third quarter. Then the last one is going to be delivered in the January 2017. And this is pretty much it. Now, we are currently working on the financing of the remaining three 11,000 TEU ships. Probably this is something that hopefully we are going to be discussing in the next quarterly results call as well.

Okay. Well, thanks for the color. Appreciate it. That is all I have for now.

Thanks.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Zikos for any closing remarks.

Thank you. Thanks a lot for being here with us today. We’re looking forward to speaking to you again in the next quarterly results call. Thank you.

And thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect.