Costamare Inc. (CMRE) Q3 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Costamare Third Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Gregory Zikos, CFO. Please go ahead, sir.

Thank you and good morning, ladies and gentlemen. During the third quarter, the company delivered positive results. On the financing side, we entered into a debt financing agreement with a leading institution for the financing of the Maersk Kowloon. The vessel has a 5-year charter to Maersk. Regarding our commitments, all of our new building program is fully funded with remaining equity commitments amounting to only $2 million, due in 2018. Regarding chartering, we chartered in total 15 ships during the quarter at substantially higher rates. We have no ships laid up. Finally, on the dividend and the Dividend Reinvestment Plan currently in place, members of the founding family have decided to reinvest in full the third quarter cash dividends. This is sixth consecutive quarter that insiders have decided to reinvest their dividends in new shares. Moving now to the slides presentation. On Slide 3, you can see a summary of our recent chartering activity. The way the market has been moving is obvious. On average, the ships openings have been re-chartered at a 23% higher rate. On Slide 4, you can see the new financing for Maersk Kowloon, which has been acquired in the second quarter and commence its five-year chartered to Maersk Line. The loan has been amortized during the tender of the chartered party. We also sold during the quarter two nearly 30-year old container vessels for demolition. The sale of those ships resulted in a Mykonos gain of approximately $1.5 million. Moving on to Slide 5, during the previous quarter we declared $0.10 cost dividend per share on our common equity and evidence for all three classes of our preferred stock. As already mentioned, insiders have decided to invest all their third quarter cash dividend in new shares under our dividend reinvestment plan. On Slide 6, you can see the third quarter 2017 results. During the third quarter of this year, the company generated revenues of $101 million and adjusted net income of $17.2 million. Based on the above, the third quarter adjusted EPS amounts to $0.16. 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 loss resulting from derivatives; the amortization of the prepaid lease rentals, which is a non-cash charge; and the non-cash G&A expenses. On Slide 7, we saw the revenue contribution for our fleet. 99% of our contracted cash comes from first-class charters like Evergreen, MSC, Maersk, Cosco, Hamburg Sud, and Hapag Lloyd. We currently have $1.3 billion in contracted revenues and the remaining time charter duration of about 3 years. On Slide 8, you can see the resilience of our business model. The bar shows the revenues and adjusted net incomes since 2008, the dotted line is the time charter index. Irrespective of market movements, the company has been consistently performing. Moving on to Slide 9, as of the end of this quarter, we have cash on balance sheet of $234 million. We are conservatively managing our balance sheet having brought down net debt from $1.7 billion in 2013 to $1 billion as of today. During a five-year period, we have raised debt financing of close to $750 million for new business. Based on the latest compliance certificates provided to our lenders we have a leverage in the region of 51%. On the last slide we are discussing the market. Charter rates moved up during the first three quarters of the year with a market softening since the beginning of the fourth quarter. The ideal fleet currently has moved up to 3.1%. The order book remains at a historically lower level of around 14%. As already mentioned, we’re actively looking for new transactions in this market environment. This concludes our presentation and we can now take questions. Thank you. Operator, we can take questions now.

Thank you. [Operator Instructions] Today’s first question comes from Chris Wetherbee of Citigroup. Please go ahead.

Good morning. This is [indiscernible] on for Chris.

Hi, good morning.

Hey good morning. First question is, there were several vessels, I think around 10, approaching the end of charters in that two months, just wondering if you could comment on the renewal activity so far in fourth quarter?

Yes, two points. First, as you have seen we chartered 15 ships since our latest announcement. So, we have been relatively active and today although the number of partnerships has come-up slightly about 3%, we have no ships laid-up. So, I cannot possibly predict the rates and the tenders for which those ships will be chartered, but I can tell you that we will try our best in order to maximize the potential of those assets. I’m afraid I cannot give you a precise answer about the chartering of those ships. But generally speaking, we started marketing the vessel some time before its opening, meaning before this comes out of charter, either with the current charter for an expansion or with new charters.

I see, that’s helpful. Just to follow-up, do you have any updates on the two vessels that are scheduled for delivery in 2018?

Yes, you are referring to the 2-new building’s chartered to Konstantakopoulos for several years. Those ships, based on the latest information we have, those ships will be delivered on schedule mainly during the first and second quarter of 2018. So, the first ship will be delivered during the first quarter of the coming year and the second during the second quarter as per the initial schedule with the CPR. The ships are chartered to Konstantakopoulos for several years and just to remind you that those ships have been bought under our joint venture with York and Costamare has a 49% stake in each of those vessels.

Okay, that’s helpful. If I may, can I tell that order book for containership now, I think it is 13.8%, but there are a lot of ships to be delivered in 2018 assuming no slippage, can you give us some color on how you think about order book and the charter with the environment next year? Thank you.

Yes, you are right that we have an order book today which is slightly below 14%, which from a historical perspective is a very low number. However, there are deliveries to take place within 2018, different people come with different projections regarding what’s going to be the net additions to the plate and this has to do with the assumptions you make regarding slippage and the demolition of order ships. The order book today is heavily stood towards the larger vessels and there's more than a million TEUs to be delivered next year. However, the precise numbers have to do a function of the slippage and of the demolition, so I cannot possibly forecast that. However, from 2019 onwards the order book is very thin and apart from the 2 latest quarters from liner company, which we sold which are for large vessels 20,000 TEUs, generally speaking the newbuilding market has not been very, active, especially compared to the previous years.

Okay, that's very helpful. Thank you.

Thank you.

And our next question today comes from Gregory Lewis of Credit Suisse. Please go ahead.

Hi good afternoon. This is Joe Nelson on for Greg today and thanks for taking my questions.

Hi Joe.

So, first one from me, the market looks to be off its bottom and it seems to be in the early stages of a recovery here, are customers beginning to come to you with longer terms on their charters, maybe looking to extend where it may be a year ago it was a six months charter now, maybe it’s a year, is that a better rate, and then maybe a second part to that is, what do you think we need to see before we start to get those real long-term multi-year charters starting to get fixed once again?

The charter market has been moving up during the first three quarters of the year. From the beginning of October, which is something relatively usual in containership because they sound seasonality there. We have seen some softening in charter rates, especially after the week of the Chinese New Year. However, we are not sure - I'm not sure whether this is a trend or whether this has to do with the seasonality of the business. Now, as you may have seen, we’ve chartered our tow 11,000 TEU ships for about a year, and in the second quarter we chartered three 700 ships for five and seven years. So, I cannot say that today there are long term or medium-term fixtures, like the ones we experienced in the past. However, there are transactions which involve longer charter durations. Now, one needs to be done or what do we need to see before liners permitting for longer periods. This has to do with Hispanic company's strategy, positioning, it’s also a function of demand growth and liners I guess they need to feel comfortable about committing for long term chartered in Doughnuts [ph]. I cannot possibly predict when this will be happening, but we’ve seen some encouraging signs over the last quarters.

Okay, thank you. And then second, and thinking about your fleet, the IMO does have a couple of new environmental regulations coming into effect, the ballast water treatment, sulfur caps and some of your customers have been pretty vocal in their support of some of these rules, do you have a view on what if any potential capital outlays might be needed in say the next two years or so to position your fleet ahead of this new rule?

First of all, regarding the water ballast treatment this as per the latest development this will be affected from 2020 onwards and this was postponed, so it’s like 2.5 years until actual implementation. We have - internally we have looked at numbers say about how much would be the CapEx required for that, but I think it’s in shipping like trying to predict 2.5 years in advance, what’s going to be the situation and what’s going to be the capital outlay required from 2020 onwards. I’m afraid this is going to be a very generic approach. So, for the next 2.5 years, as far as we know the water ballast treatment is something that will not be applicable. However, we have ran some numbers from 2020 onwards, but it is at a relatively premature stage today.

And just kind of thinking about it, when do you think you might have to make some decisions on timing your any potential upgrades is it maybe next year or [indiscernible]?

It is impossible to know to date to whom those ships will be chartered in 2020, it is the first point. And the second point, I guess like a year in advance or like some quarters in advance we will have a much better picture, but from our side we will make sure that whatever cost requirements are there we’re going to be more than able to meet them.

All right, thank you very much for the time today and I’ll turn it over.

Thank you.

[Operator Instructions] Today's next question comes from Ben Nolan of Stifel. Please go ahead.

Thanks. Hi Greg. So, I wanted to follow-up a little bit on something you were mentioning earlier with respect to looking for new opportunities, and obviously you did the Maersk vessel and announced it in the second quarter, has there been much activity there among some of the liner companies looking at their existing fleets trying to find assets that can be chartered out, you know taken off the books and held by someone like you and doing it on longer term charters or more of your conversations are revolving around sort of new builds and new opportunities?

Today the newbuilding market is not very active, you know with a couple of exceptions. Most of the discussions or you know, the new transactions we look at, they mainly have to do with secondhand vessels either as a leaseback or you know buying from a third partnership owner or bank or financial institution and chartering out the ship to the liner company for a period. We have not engaged in any discussions regarding newbuildings today and the market is not very active in that front.

Okay. But there are discussions for maybe existing equipment that sort of thing is more active I guess?

Yes. Say in a leaseback or sort of buying sound distracting brackets type of assets which you know we can lease out or charter to liner companies. I think this is the vast majority of the business we are looking at. We are engaged in a lot of discussions, we are generally active. However, we need to make sure that this we are going to be entering into. We will also be making sense for our shareholders. The first thing we look at every transaction is first to cover our downside and then the second step is to also make sure that there is some good return for the shareholders.

Okay. So, to that extent or thinking through to it, you know obviously you guys had been relatively active in buying vessels without contracts over the last few years just to distress prices, as well as a few sale leasebacks, but are there - given the improvement in asset values, do you think that there is still good value in buying vessels without contract or is better at this point in the cycle to be doing things that have firm contracts and guaranteed return?

I think you can still find the deals that makes sense whether it is with the charter governance like the transactions we did in the beginning of the year with Maersk or you know bank ships with equity with short remaining times of the duration, as long as we feel comfortable with the quality of the assets and also with its chartering potential we're looking at both cases. Of course, we know that if we buy something without charter covenants we need to make sure that the price we pay is something that we feel very comfortable with the chartering potential of this vessel.

All right. And then lastly for me, this is something that has come up in a few conversations that I have been having with various owners recently, it seems like some of the bigger owners like yourselves did relatively good job or had better success in finding employment for vessels in the really trough parts of the market rather than a lot of the smaller operators who - it seems like they had to put preponderance of layouts, and there is a sense among people that I have talked to that it’s increasingly harder for smaller container owners to really be viable throughout the cycle and then it makes more sense for big owners to sort of be that counterparty for the liners, is that something that you guys feel as well and are you seeing any difference in the level of competition out in the market.

It’s a relevant point. First of all, it is a capital-intensive business and as a ship owner you need to maintain the vessel in such a way so that it can be chartered out to a major liner counterparty. So, although what you say may have to do with the physical condition of the vessel and with the quality of maintenance. Also, liner companies want to charter in vessels from ship owners, they know that they have the financial means to service their debts, to manage properly the vessels for the coming years. So, although I don't have something specific in mind I can tell you I can tell you that generally having access to capital and being well capitalized it is something that definitely makes sense especially in today's market environment.

Okay. All right, thanks a lot. Appreciate it.

Thank you.

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

Yes, hi Greg, thank you for the opportunity. Greg, I want to ask about the competitive landscape and the user of the capital that you have in your balance sheet, I understand that our surprises have moved up the last six months. I’m wondering whether encounter more competition from other ship owners when you look for new acquisitions or from liners and how overall is the landscape out there?

I think that if you compare the competition we are seeing today with the competition that we experienced years ago, I think today this is the less competitors, I would say pure container ship owners. As I was mentioning earlier, access to capital, whether it is equity or whether it is commercial bank debt or whether it is Chinese leasing, in whatever form it sounds definitely important. And the competition is much less compared to what we saw in the past. This is the first point. The second point is that Costamare has been shipping for over 40 years. So, there are very strong relationships with all of our clients, and we need to make sure that we cater to their need. So, there is competition today. However, the competition is much less from what was in the past, which is a healthy sign.

So, can you give us an idea of how many deals you have seen in the last six months since the most recent capital rate and what were the reasons that we haven't seen any deployment of this capital and also would you consider using part of this capital to buy back your stock?

Yes, we have seen, first of all we have done some transactions since the beginning of the year and two of those vessels where 2014 built, the other was 2005 built - sorry 2012 built, but we have seen transactions that - and we have done some deals now. We have participated in values bid processes for ships coming out from other ship owners or coming up from financial institutions. However, you know we were willing to bid for a specific price for the vessel and we didn’t want to take excessive residual values. We might have access to commercial bank debt. The cash on balance sheet of north of $200 million to use as equity. However, it doesn’t mean that we're going to go and buy or commit to anything that is just out there without making sure that we feel comfortable about the quality of the counterparty and of the bill economics. So, if you ask me, yes, we have seen a number of transactions involving more than I would say 15, 20 vessels over the last couple of quarters, but we have passed on most on most of them. It doesn't mean that and today as we speak we look at a lot of things, I think that there are definitely opportunities, hopefully over the next quarters we’re going to be able to discuss those in more detail, but we also have some internal risk assessment and we need to make sure that we don't take excessive risk especially in today's market environment.

Thank you, Greg. One last question. There are some articles out there about potential comparison with one of the largest ship managers and ship owners in the containership space and the creation of a joint venture, chartering joint venture with Costamare, is there something that you can comment about to give us some color, how important it is for you that you have a larger fleet to higher secure profitable charters versus some shipowners that has a much smaller vessels and how this corporation contains your bargaining power versus your customers.

I cannot say a lot at this stage also for legal reasons. The only thing I can say is that we are in discussions regarding putting together just a simple charter brokerage business. That’s all. I cannot say more and you know this is something that we can discuss, I guess in the next quarterly results call.

Could you give me a brief comment of the importance of having a last fleet versus ship owners who have two or three or five vessels, and how different is the competition when you are trying to secure charters?

I think that it’s two things. What we are trying to, what we are discussing with our German counterparts. I have to stick to that, it is a charter brokerage business where we are going to be combining the commercial chartering activities of our fleet, and that’s all. We feel it is something that generally makes sense. Costamare will not be involved, it’s going to be a appellant partnership being involved. Costamare will not be part of this agreement. So, at this stage I’m afraid, I cannot say anything more. However, I have to say that it is a simple, a plain charter brokerage business that's all.

Thank you very much Greg.

Okay, thank you.

And our next question comes from Mike Webber, Wells Fargo. Please go ahead.

Hi good morning Greg, how are you?

Hi, Mike good morning, thank you.

Just a couple of questions, a lot of it’s already been kind of passed over, but I just wanted to comp, maybe where you are this year relative to last year when rates got a bit tighter, a bit faster than everyone expected, it looks like the ideal shipping capacity is, it is up maybe quarter-on-quarter, but we are still off year-on-year, so things are naturally a bit tighter this year relative to last year. I'm just curious, how would you compare your rate expectations for the next six months relative to where we were last year and do you think we’re on the same kind of seasonal pattern or be it may be a bit amplified?

Yes, look, last year 2016 I think it was a very bad year for container shipping, especially for charter rates, if you look at the charter rates like Q2 or Q3 2016 versus 2017 today the market is much better and charter rates have improved substantially during the first nine months of this year. Now we have seen some softening beginning from October 2017, which is something expected from our side and it has got to do with seasonality, Chinese New Year, and traditionally the third and especially the fourth quarter of every year are the type of weakest quarters in container shipping. Now I cannot predict that where sort of rates are going to be heading moving forward. However, I can tell you that there are positive signs coming from demand growth, which you know has been exceptional up to now this year. The order book apart from two big newbuilding orders put by liner companies has not been very active and you know we haven't seen a lot of newbuilding ordering. There is up to now at least, generally speaking much more disciplined. Charter rates, although they are much below midcycle levels they sort of have improved and it remains to be seen whether they will continue. So, from 2019 we have a very thin order book. So, there are some positive signs, however it is a market we have been experiencing a down market generally speaking here for the last six, seven years at least. I cannot possibly predict, but I can tell you that as a company we know what to do and we have a plan under a scenario. If the market stays as it is, meaning the softening in the charter rates. This may provide with more opportunities. At the same time, we have ships that are coming out of charter over the next couple of quarters and it’s going to be a positive surprise to see the market moving where it was beginning of this year.

Okay, thanks. And maybe just one more strategic question. You think about the fact that you’ve got some real consolidation happening among the liner complex as opposed to alliances and really kind of more capital discipline, hence those larger lines, the cost of capital advantage there relative to their, at least their containership we see partners is going to be even wider and invited. I'm just curious, when you think about the intermediate to long term with larger customers, do you think, when you look at your fleet you have got the smaller operating vessels, it’s probably higher return business and you got these large slugs of vessels on the container lines, does that business make sense in terms of those large slugs of large ships chartered into lines, you know 5, 6 years from now do you think you, if you look at the split of your business, do you think you are more of an operator in five years then you are may be kind of a balance sheet provider to some of the container lines?

Look, we have always been an operator and we’ve also seen us as like…

You are an operator now. Most of them are your competitors, I'm just curious does that split yet a bit wider 5 years from now, are you doing more of that shorter-term business where you can really add value from an operating perspective of those who just kind of chunks of capital, that's just less effective.

I think that - like I’m not predicting the future, but I can tell you that our strategy is to remain an operator. Charter outage through liner companies. Liner companies you know they always need to charter in some ships and they cannot own 100% of the fleet they operate. However, it is not part of our strategy to sort of become a financing vehicle. We, our goal is to continue buying operating financing those assets, we chartered out to liner companies, and we also take the residual value risk at the expiry of the charter project. This is what we have been doing and I think this is what we will continue doing. I understand that the market the liner company business, it is much more consolidated. At the same time, this has some positive implications because we have strong clients, you know who may be willing to do bigger business, but I don't think that this should change our business model.

Okay. Thanks for the time Greg.

Thank you.

Ladies and gentlemen this concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Zikos for any closing remarks.

Thank you very much for your interest in Costamare and for dialing in today. We’re looking forward to speaking again with you at the next quarterly results call. Thank you.

Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.