Costamare Inc. (CMRE) Q1 2017 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 2017 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 Friday, April 28, 2017. 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 statement. And I will now pass the floor to your speaker today, Mr. Zikos, please go ahead.

Thank you. Thank you and good morning, ladies and gentlemen. During the first quarter, the Company delivered solid results. On the chartering side, we have now chartered all 5 11,000 TEU newbuildings for periods of up to one year and we have secured the finance for the last remaining 11,000 TEU ships. As of today, all of our newbuilding program is fully funded with remaining equity commitments amounting to only $2 million during 2018. We continue to charter our ships having chartered in total seven vessels since last quarter. We have no ships laid up. At the same time, we are renewing our fleet. We have bought three secondhand vessels, which have been chartered for periods ranging from five to seven years. Those vessels are expected to be delivered within May. The ships have been bought with equity and we are in discussions with financial institutions regarding their finance. Finally, on the dividend and the dividend reinvestment plan currently in place, members of the founding family, as has been the case since the inception of the plan have decided to reinvest in full the first quarter cash dividend. As mentioned in the past, our goal is to strengthen the company and enhance long-term shareholder value. In that respect, we are actively looking at new transactions selectively. Moving now to the slide presentation, on Slide 3 we are providing a summary of the chartering arrangements with regards to our 5 11,000 TEU vessels. The vessels have been fixed for periods of up to one year at an average daily rate of about $18,000. We also bought three modern secondhand ships, two 2014 built wide-beam 5,000 TEU vessels and one 2005 built 7,500 TEU ship. All the ships have been fixed on long-term charters to Maersk at current rates. On Slide 4, we are providing a summary of the chartering arrangements which have taken place since January, we chartered in total seven vessels over the last months. We have no ships laid up. On Slide 5, we saw the financing of the last 11,000 TEU newbuilds. The new $44 million facility is on similar terms to the facilities for the sister vessels and will be used to fund the delivery installments. During the quarter we also sold for demolition two vessels. On Slide 6, we are showing the dividend declaration for the first quarter. We declared $0.10 cash dividend per share on our common equity and dividend for all three classes of our preferred stock. As already mentioned, members of the founding family have decided to invest all their first quarter cash dividends in new shares under our dividend investment plan. On Slide 7, you can see the first quarter 2017 results versus the same period of last year. During the first quarter of this year, the company generated revenues of $105 million and adjusted net income of $21 million. For the same period of 2016, the revenues amounted to $120 million and adjusted net income to $34 million. Our adjusted figures take into consideration the following non-cash items: the accrued charter revenues; the gain or loss on sale of vessels; the gain 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 first-quarter adjusted EPS amounts to $0.23. On Slide 8, we are showing the revenue contribution for our fleet. More than 99% of our productive cash comes from first-class charters like Evergreen, MSC, Maersk, Cosco, and Hamburg Sud. We have $1.6 billion in contracted revenues into a remaining time charter duration of about 3.3 years. On Slide 9, you can see the resilience of our business model. The bars, other revenues and adjusted net incomes since 2008 and the dotted line is the time charter index. As you can see, in a cyclical industry and irrespective of market movements, the company has been consistently performing based on its long-term contracted cash flows with top charterers. On Slide 10, you can see our remaining CapEx commitments. Following the financing of the last 11,000 TEU ship, the company has above $2 million of remaining equity commitments. On the right-hand side of the slide, we also show the recent acquisition as part of our renewal of the fleet. The three vessels acquired, which are expected to be delivered next month have all rechartered for periods of five to seven years to Maersk's line with contracted revenues in excess of $100 million in total. Slide 11 deals with a potential effect of the rechartering for the remainder of 2017. As you can see, even if we assume the 30% discount on new charter rates entered into during the next nine months versus current figures, the difference in our revenue basis would be about 5%. Finally on the last slide, we are discussing the market. Charter income picked up across all asset classes in recent months. The number of idle ships has significantly been reduced to 3.4%, which are levels we haven't seen since the third quarter of 2015. The order book has decreased to around 15%. We are actively looking for new transactions in this market environment and our goal is to strengthen the company and enhance long-term shareholder value. This concludes our presentation and we can now take questions. Thank you. Operator, we can take questions now.

Thank you. [Operator Instructions] And your first question comes from the line of Chris Wetherbee at Citigroup.

Hey, great. Thanks and good afternoon guys.

Hi, Chris. Good morning.

Good morning. I wanted to ask about, sort of the opportunities in the market. You guys were pretty busy during the quarter, lots of transactions and demolitions. I want to get a sense of maybe, if you look at the landscape right now, we just saw - I think a large fleet deal done recently in this space. Are there those opportunities for you? How are you positioned for that? I guess, what is – sort of where are you most focused now in terms of the fleet? Is it, obviously, there is rechartering needs, but when we think about sort of acquisitions and demolitions, I mean, what’s out there and what are you interested in?

There are today opportunities. And you saw in the last quarter we put three ships chartered to seven to five years to Maersk. There are definitely opportunities, especially in the second-hand vessels. As we all know, the newbuilding market today is not very active, I would say, quite the opposite. So, there are no significant newbuilding orders year-to-date or even during the previous quarters. Now, as I said, we are sort of active and at the same time we are selective in how and where we are going to be using our equity. How do we position ourselves? This was the second part of the question. We have cash on balance sheet of – north of $180 million. We have access to bank debt – to commercial bank debt. We have access to Chinese leasing. We have done quite a lot of those. And at the same time, we have the JV platform with our partners, York Capital, which has an investment period up until 2020. We have no ships laid up and at the same time, we are extremely comfortable with the quality of our charters going forward. If you look where the charters are, you will see that these are the best things today in the sector. So, overall, I would say that we are first very well positioned to move ahead and we will continue being active, especially in today's environment. And there are opportunities. However, at the same time, as I said, we are selective and we are going to make transactions that really make sense from a pure shipping perspective as well.

Okay, that's helpful color. I appreciate it and then when you think about sort of the depth of the charter market out there, obviously there is a lot of transactions in the quarter. Everything continues to be in relatively short duration and understandably so, do you feel like, as we kind of strengthen – potentially strengthen through the spring that there will be opportunities to get a little bit longer-term charter opportunities out there for you? Just want to get a sense of how you feel the depth of the market is currently.

Look, you are right that generally most of the figures we see now are for revenues speaking to shorter periods especially, if you compare with the charter - we used to see some years ago. At the same time, we fixed three ships for periods of north of five years, the one vessel five years and the other two for seven years. So, there are opportunities. The thing is that, you need to be patient but at the same time active in order to capitalize on those opportunities. But there are definitely a lot of transactions out there which definitely make sense.

Okay. That's helpful. I appreciate your time this morning. Thanks very much, guys.

Thank you. Thanks a lot.

Thank you.

Next question is from Noah Parquette at JPMorgan.

Thanks. Hey, I just wanted to follow-up on those charters. I mean, five to seven year charter is pretty good in this market. Can you talk a little bit – those weren't vessels sold by Maersk and leased back, right?

No, those are vessels which have been bought from a third-party seller. We bought them and we chartered them to Maersk.

Okay. And…

Yes.

Yes, and so, what do you think has changed in the mind of something like Maersk, where they want charter coverage for those vessel classes? I mean, are they looking at the pop in the Panamax rates? Or is it just something different?

Look, apparently they needed those specific vessels for a longer period and that didn't made sense. Also, if you look at our fleet lease, we have three ships chartered to Maersk in 1996, 1997 built, which mid of this year will be phased out. So, I mean, it was a transaction which overall I think made sense both – for both parties. But those ships, the five to seven year charters, apparently, they meet the demand of Maersk for this type of tonnage.

Okay, all right. That's all I have. Thanks.

Thank you.

The next question is from Fotis Giannakoulis at Morgan Stanley.

Yes, hi, Greg and thank you. Greg, you mentioned about the increase in charter rates and the impressive decline in idle activity. If I notice, well, you said that the idle capacity right now is about 3.8%. That used to be a few months ago at more than 8%. What has changed in the market? Why this appetite by the liner companies to secure tonnage? Is this because some of the vessels that they have currently in their fleet they come out of contracts? Or you see some improvement in global trade and if that's the second, which areas do you see that the global trade is improving?

Yes, first of all, the number of idle ships today based on the last vessel-related information we have is 3.4 of the total fleet in the water. We just launched to several hundred thousand TEUs, which is a very low number and this is the lowest figure we've seen since 2015. I would say that the demand is generally at healthy levels. There is some increased demand from liner companies to chartering tonnage. The alliances now have been settled. So I mean, apparently liner companies know what their chartering needs are. And all these charters contributed to the number of idled ships falling substantially. I cannot predict the market, but I can tell you that year-to-date, charter rates have substantially improved and also the same time, the number of idled ships is slightly below 700,000 TEUs in terms of tonnage, which is a very low number also from a historical perspective. At the same time, order books stands at 16%, which again from a historical perspective is a very low figure. There is a very thin order book for ships to be delivered in 2019. So, definitely all these are positive parameters.

Can you also comment where these vessels are deployed? Or they are going to be deployed? Do you see any specific regions or any specific trades that they have attracted their liners’ interest to add additional tonnage?

No, no, I think is overall, I mean, if you look at the trade growth in Asia, Europe for 2016 and for the first couple of months of 2017 also, the Transpacific trade as you know - or the transport tonnage rate. All these they have been posting change in growth levels. I cannot be more specific for a specific trade, but generally, especially after the settlement of the alliances, so there is some increased need for chartering in tonnage, which has been reflected in charter rates and it’s also has been reflected in the number of idle ships that has fallen. There are some specific asset sizes that have posted significant charter rate increases over the last couple of months. But overall, the market, over the last months has been very positive.

Thank you, that's very helpful. Given this improvement and it seems that the world is growing nicely and it seems that this is a more - an overall growth rather than specific region growth. At what point do you expect that the liners will have to start thinking further ahead in the future and I am talking about how far are we from liners to start taking chartering long-term newbuilding vessels? Is this something that is going to take a year or if you see there is two or three years ahead?

I am afraid that, first of all, this is a question that needs to be firstly answered by the liner companies. I cannot predict. I can tell you the fact that in 2016, you can argue that we had the negative growth in supply. In terms of the TEUs being scrapped, the number was higher than the newbuilding orders being put during that year. But going forward, what it's going to take or how long it's going to take, until we come back to the time where liner companies can commit for longer periods, 5, 7, 10 years or north of that for newbuildings. I am afraid it would be difficult to predict right now. I don't want to give a prediction which it's also based on other companies' considerations.

And my last question, in terms of the latest deals that you announced, you didn't give a lot of details about their economics. We have used to see from your transactions that they give double-digits EBITDA yield. Are these deals comparable to the previous ones that you have done or have you seen any return contraction given the previous months of oversupply?

Look, for this transaction, we have given the charter rates and the tenor and the name of the charterer. The only thing we have not disclosed is the purchase price, which for commercial reasons, we couldn't disclose. Also this transaction with Maersk, as I said, it's a deal which also involves three additional ships chartered to Maersk, which as of the mid of this year will be phased out. But overall, if you see this deal, it is providing us with contracted revenues of north of $100 million on a standalone basis. And if you look at our sort of our past EBITDA margins, you will see that it is a build that we definitely feel it makes sense, especially if we combine it with bank debt at attractive terms, which we are now in the process of doing. Hopefully, the next quarter, we are going to be in a position to also announce the funding and the terms of funding for those assets.

Shall we assume that the returns – return expectations of the company have remained the same as they have been all these previous years? And can you also remind us at what levels, at what cost are you able to secure bank debt in today's market?

Well, the returns expectation also - the way we look at the transactions, it has been the same throughout the last year. So since the company's inception, we haven't changed the way we look at things. That’s at in size like today it's obvious that we are more active. Now the bank debt, it's not only a function I mean, and how competitive it is. It's not only a function of the cost of the debt, but it is a function of what is the leverage, what is the debt repayment profile. What are the covenants if any that come together with that debt? If you go to our 20-F, you will see that on average, our sort of all-in cost of debt sheds – it is a region of 5%, 5.1%, but hedged for the years to come. So, I will say that it’s overall a general competitive rate based.

Thank you very much, Greg. Great quarter.

The next question is from Gregory Lewis of Credit Suisse.

Yes, hey, thank you. Good afternoon everybody.

Hey, thanks for calling.

Hey, Greg, I just wanted to follow-up on Fotis's question in a little bit different way. Congratulations on those charters and realizing you can't disclose the purchase price and there is still some details that need to be ironed out. But if you – this is more from, I guess a modeling standpoint. If you think about the earnings accretion on these vessels, should we think about, given where we are in the cycle, which things are better, but it's still pretty lousy? Should we think about the amount of financing or financing cost ex sort of amortization at this point, should we think about these deals being earnings accretive or maybe earnings neutral, if you think about it that one?

Yes. I think that you should think of those still as being definitely earnings accretive.

Okay, great. And then, clearly, I mean, we've seen idle fleet go down. It seems like clearly there is the seasonal pick up. It looks like we saw something similar last year. Do you have any sense over as that, what 5% of the fleet has gone back to work? Have these been longer-term contracts or is this something where there is a nice seasonal pickup, but the liner companies', customers are really more worried about securing tonnage for the next, call it, three, six, seven, eight months as opposed to the next year?

I would say that overall, the tenor of the charter part or of the commitments are relatively short. I mean, of course, you know you may have transactions of five to seven years like what we just did, but sort of overall, I think that charter tenors are in terms of months. I would say three, six, nine months, or something like that, generally speaking. Of course, you can have longer or even shorter figures. But I would say that generally the figures are for a relatively short period today.

Okay, great. And then, since you are – since the company has gotten a little more aggressive, makes sense where we are in the cycle. The sellers – are these sellers – the transactions you are coming across, are they primarily financial institutions, other distressed charter owners that you can kind of sort of what parcel that out in terms of, where are the vessels coming from, first that are for sale that are a little bit more – that are already on the water?

Yes, it could be other ship owners who may be experiencing some liquidity issues or it could be also financial institutions or it could also be ship owners, who don't have a liquidity issue, but they may not feel comfortable with the potential of the assets or they may not be able to charter it. But it could be a mix of pretty much everything. It's an open market. So it could be both banks and ship owners with or without liquidity issues.

Okay, hey, great. That sounds like a lot of opportunities are going to be showing up at your doorstep up. Hey, guys. Thank you very much and have a great weekend.

Thank you.

Thank you.

The next question is from Ben Nolan with Stifel.

Yes, thanks. Hey guys or Greg. So, I wanted to follow-up a little bit on this vessel acquisition and you laid it out pretty well in that that these are effectively replacement vessels for Maersk. Obviously, it looks like the existing time charter contract was cut by six or nine months and I assume that was a little bit of a give and take, you replaced ships – you replaced vessels with more modern ships and you also, at the same time were able to leverage that into longer-term contracts. I guess, what I was curious is, do you think there might be other opportunities to do that where, maybe you can shorten the duration of an existing contract and swap it out for longer contracts either on the same vessels or for newer vessels? That seems like an interesting way to compete for some of the longer term business that might be in the market.

Yes, definitely. And we did transactions like that back in 2013 and 2014 as well. It's just that, in that case, we had scrapped some ships, although those K-class ships, which are going to be in essence replaced by the three younger vessels, may not be scrapped. They will continue being deployed. But yes, this is something we've done in the past and this is which something we feel definitely makes sense today. And if you have a very strong charterer and you can extend existing charter arrangement for a longer period and at the same time renew the fleet, I think it is a win-win for everybody. And now on top of that, if you can combine this fleet renewal with a competitive debt structure in place, this is where the returns are coming from.

Yes, yes, now, I mean, I think it makes sense. Is that – is the reason or given that these are effectively replacement vessels is that why these transactions were done outside of the joint venture? It seems like almost all the other acquisitions lately had been through the JV. These aren't – has anything changed there or this is just sort of a one-off?

No, there is no change there. But those ships that will be replaced, they are ships that were bought in the past and are 100% Costamare owned. But leaving that aside, so these transactions could be done sort of only at the Costamare level.

Okay.

However, the JV with York is active. We are looking at things together with York. We have an excellent relationship. And as I mentioned earlier, we have an investment period up until 2020. So there is still a lot of time and we feel extremely comfortable with this platform.

Okay and then lastly for me, obviously you scrapped two vessels in the quarter. It looks like these three Maersk vessels going to be off contracts are little bit older. How should we think through how you guys are going to be scrapping vessels over the next years or what’s sort of the plan for fleet renewal in terms of removing ships?

Yes. The scrap would be something we look at on a case-by-case basis. Those three Maersk vessels may or may not be scrapped, they may continue trading. It depends on the physical condition of the vessel and it depends on the market potential and to the upside. So, I mean, we look at it on a case-by-case base. However, when we feel that there is not a lot of upside, I think, the right decision is to scrap the vessel, which is something that is helping the whole market.

Okay. So there is not a definitive plan? It's just as, sort of as-needed, I suppose?

Correct, correct.

Okay, all right. That does it for me. I appreciate it Greg. Thanks a lot.

Thank you, Ben.

[Operator Instructions] At this time, there are no further questions and I’d like to turn the floor back over to Mr. Zikos for closing remarks.

Thank you very much for dialing in today in the Costamare Q1 2017’s results call. We are looking forward to speaking with you again during the next quarter results. Thank you.

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