Costamare Inc. (CMRE) Q3 2020 Earnings Report, Transcript and Summary

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Inc. Conference Call on the Third Quarter 2020 Financial Results. We have with us Mr. Gregory Zikos, Chief Financial Officer of the company. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, October 28, 2020. 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 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 third quarter the company continued its profitability. As part of our fleet renewal program, we sold for demolition two vessels with an average age of 23 years and we agreed to acquire three larger second-hand ships on average 11 years younger. The new acquisitions will be initially funded with equity. Meanwhile our newbuilding program is progressing on schedule and we have now accepted delivery of three out of five 15,000 TEU vessels, which have commenced the 10-year charters. On the market the inactive containership fleet continues to shrink to leverage below 2% on the back of healthy demand for container shipping. Charter rates have been rising and we have chartered in total 13 ships during the quarter. We have 14 ships coming off charter over the next six months, which positions us favorably should the market momentum continue. With liquidity of above $200 million no meaningful debt maturities over the next three years and minimal CapEx commitments, we are well positioned for acquisition opportunities, increasing shareholder value and returns. Moving now to the slide presentation. On slide three we are presenting a company snapshot. More than 45 years in the shipping industry and uninterrupted dividend payments since going public, strong sponsor support, never had to restructure our debt, smooth debt repayment profile, fully aligned interest, no related party acquisitions, steady management and ownership and high-growth potential with no legacy debt restrictions. Moving to the next slide. Here you can see the resilience of our business model. Steady volumes of income in a high volatile shipping environment. On slide five you can see the highlights. Adjusted net income for the quarter is $27 million and the adjusted EPS is $0.22. Our adjusted net income for the first nine months of this year is $91 million and EPS is $0.76. We do maintain a strong balance sheet with liquidity of about $210 million, leverage of approximately 42% and no meaningful debt maturities until 2024. Moving to the next slide. As part of our fleet renewal program, we continue the sale of older tonnage. Over the past quarter we sold two containerships with an average age of 23 years and replaced them with three younger vessels with an average age of 12 years. The three new vessels will be initially funded with equity. We have set the delivery of two 13,000 TEU containerships out of a series of five sister vessels. The ships have commenced their ten-year charter with Yang Ming Lines. Slide seven, we have chartered in total 13 vessels during the quarter. The charter market has been rising on the back of positive supply and demand fundamentals. The idle fleet has dropped to 1.8% and the order book is at 8% and it is expected to remain low. We have 14 vessels coming off charter over the next six months, which positions us favorably should market momentum continue. Finally, we will pay our 40th consecutive quarterly dividend in November. Insiders have been participating in the DRIP and since inception has in total invested $92 million. In the next slide, you can see the third quarter 2020 results. During this quarter, the company generated revenues of $108 million and adjusted net income of $27 million. The third quarter adjusted EPS is $0.22. Our adjusted figures take into consideration the following non-cash items: the accrued charter revenues, accounting gains or losses from asset disposals prepaid lease rentals and other non-cash items. On Slide 9 we are discussing our capital structure. Our leverage is comfortably below 45%. Net debt to 12-month trailing EBITDA is 3.3 times and EBITDA where net interest is at 0.5 -- so it's at five times. For non-recurring have a minimum requirement of 2.5 times coverage. On slide 10, we are showing the revenue contribution for our fleet. Almost 100% of our contracted cash comes from first-hand charters like Maersk, MSC, Evergreen, Cosco, Yang Ming, and Hapag-Lloyd. We have $2.1 billion contracted revenues and the remaining time charter duration of about 3.5 years. Slide 11 shows the contracted revenue by vessel size. As you can see more than 90% of our contracted revenues comes from vessels which are above 7,000 TEUs. On the last two slides, we're discussing the market. As shown on slide 12, charter rates have significantly improved since Q2 2020 across all the sizes, but especially for the larger vessels. Box rates have increased by more than 70% on a yearly basis. Slide 13, the idle fleet has been reduced to 1.8% from 7.9% almost three months ago. The order book has fallen to 8% and is expected to remain at low levels. Today the order book is very thin from 2022 onwards. Our main priority is to cover our downside risk while at the same time looking for opportunities in a favorable market environment. This concludes our presentation and we can now take questions. Thank you. Operator we can take questions now.

Thank you. [Operator Instructions] Our first question will come from Chris Wetherbee of Citi. Please go ahead.

Hey guys. Good morning. James on for Chris. I wanted to first touch on some of the -- so I guess the incremental here. Revenue declined sequentially but OpEx was actually up sequentially which given the chartering environment is a little bit surprising. So, recognizing that there probably was some voyage expense in the OpEx I just want to know if there is any sort of OpEx in there that might have been deferred from 2Q and that you actually incurred in 3Q? And then also on the revenue side just kind of wanted to get an understanding of what you were thinking about maybe going into the fourth quarter from third quarter. Should we expect revenue to increase sequentially from here? Just vessel count was relatively flat, but yet the TCE rate was down. So, just trying to understand the puts and takes there.

Yes. First of all, regarding the OpEx you are right they are slightly higher this quarter. On average for the whole fleet it's close to $5,500 per day. In the previous quarter, it was close to $5,000 per day or slightly below that. The reason as you mentioned has to do with some sort of incremental crew expenses that had to do with repatriation of programing of power ships. This is something we expected and I think that going forward over the next quarters, this is something that will be normalized. So, for this quarter, you can treat it as probably a one-off type of item. Now, moving forward for the next quarter and regarding the revenues this was the second part of the question. As we mentioned, we have ships coming off charter over the next six months close to 14 vessels. And the market for those vessels today especially for the larger ships it is higher compared to like the charters they are receiving today. So, generally, in a rising chartering environment and if we assume that the situation will remain the same for Q4 and for the first quarter of 2020, we would normally expect revenues coming from those vessels to generally increase. If you look at our latest fixtures, we chartered, for instance, 2,000, 6,500 TEU vessel for close to -- for 17 to 19 months, so like $21,000 per day. We chartered a 9,500 2006-built vessels for about $30,000 per day. And these rates are much higher for the latest fixtures. So, should this strength continue, I think there's generally upside. Now regarding the revenues of this quarter. In this quarter you see revenues of some ships that have been chartered during the first and second quarter of this year in a market environment, where charter rates did not pick up. Charter rates started picking up after June, July of this year. So fixtures concluded into the first quarter or like April, May of this year at levels lower compared to the pre-COVID levels.

Got it. And so just one quick follow-up on the expense side. How much was the incremental crew expense? I don't think I caught that. Just so we can quantify...

Generally, our ships on average if you look at the previous quarter and the quarter before, our ships are having on average for the whole fleet close to $5,000 per day. This quarter we were close to $5,400 per day or so. So I would expect that this is something that will be normalized over the next couple of quarters. So we should be in the region of $5,000 $5,100 per day on average for the quarter.

Got it. And then just looking ahead into the fourth quarter and the first quarter, it seems like you have some ships coming due – or vessels coming due that's for rechartering. Is there – like the market – how would you think about the current rate relative to those and what you're likely to get in terms of a premium? And then I'll hand it over.

Yes. Look we have – I will give you a specific example. We have two 9,500 TEU ships opening over the next six months the Cosco vessels. Today they are now getting a rate of like below $20,000, as sister ships have been visited chartered in this quarter at around $31,000 per day. So I mean, you can see the difference. I cannot predict where the market will be next quarter or in two quarters' time. But I can tell you that today the market for those vessels it's much higher compared to the latest fixtures. Also the Panamax vessels we have, the traditional Panamax vessels today they are adding for I don't know nine to 12 months, we have seen rates up to like $17000, $18000 per day for a standard 4,250 TEU vessel. We have Panamax vessels chartered during the first quarter of this year and are now getting slightly below $8,000 per day. And those vessels are going to be opening over the next six to nine months. So I mean, you can see the difference in the charter rate, assuming that we don't go back to the COVID level type of market where the Panamax vessels were getting in the below $8,000 products per day. I think the difference in the upside should still continue. It's quite important.

Got it. And do you think you would be able to recharter those Panamax vessels in Q4 or Q1, or is it probably closer to the expiration date?

Look, today those vessels, today I can tell you that the ships above 3,500 TEUs, most of them are being sold out and there are – and all the ships opening are like – there's a lot of demand for tonnage from line companies. I cannot predict the market. I will not do that. And I cannot tell you where the market will be in two quarters' time. However, assuming the same dynamics, we are in a much better market environment today compared to where we were in the first quarter of this year. Initially I have to remind you that during the first quarter of this year there were predictions that the container trades would go down by 10% to 12% based on the latest brokers and analyst estimation. These are not our estimates but these are analyst estimates. Container trade is going to decrease by close to 4% for the whole year on a TEU basis, which is much smaller contraction compared to the one initially anticipated. So in container shipping, we have seen up to now a much better market both with regards to box rates and to charter rates compared to the market people thought at the beginning of the year. And there's a dynamic in the supply and demand fundamentals. They seem to be quite positive.

Thank you.

Okay, take a last question.

Our next question will come from Ben Nolan with Stifel.

Hey Greg, good afternoon. I want to dig in a little bit on sort of what you're seeing in the market. Obviously we've all seen the rates a lot higher and it seems like they're pressing higher every day and the utilization is lower and that's not really a mystery to anybody. The one thing that I think would be a little bit more telling is if you were starting to see contract tenures lengthen. In your discussions with which obviously would mean that the liners are increasingly confident in the outlook for continued strength in demand are you beginning to see that at all? Are contract tenures stretching out from 12 months to 24 months or 36 months or anything of that sort?

Yes. Yes Ben, you're right. Yes we've seen that. And you can also see that in our latest features for instance the York vessel the one I referred to earlier it was getting $11,500 per day. And now this is a 6500 TEU ship 2000 build. So this is a 20-year-old vessel. And this now was fixed at $21,250 per day for a period of 17 to 19 months for a 2,000 old vessel. The previous fixture was for a shorter period. So there is a trend. This is just an example. There is a trend. So also I can tell you that the Cosco vessels that we chartered they have been charged for longer than a year. And we have seen for instance the traditional Panamax vessels getting between $7,000 to $8,000 for periods of six to nine months. Now we have seen tenures of 12 months or like north of that. And one last example I will give is that we have an 11,000 TEU vessel which like we have extended the charter for two years. Initially we have the charter period up until 2023. And during the quarter we have extended for two more years up until 2025. This is the case not an issue. And the rate for the 5-year period is $36,650. So generally, I would say yes that there is a tendency for longer periods and also a tendency for shorter extension options awarded to the charterers. So from that respect I would say that the market is tightening. And it's common to see longer periods with shorter extension options when the charter rates have been moving up.

Sure. Yes. Although again, if there was an anticipation of the liners that maybe this is just seasonal or something that maybe they would be a little bit less apt to go low on tonnage. The -- changing topics a little bit. As you had mentioned there hasn't been much. The order book is low. There's been virtually no ordering of size all year. There's been some rumors including some of which you guys have been involved in that maybe that's picking up a little bit. First of all, are you in the market if the terms are right to be ordering ships? But secondly, has there been any change in the return profile? I know publicly one of your biggest competitors has said they're not really looking for new buildings at the moment. But has that had any impact or the availability of capital or whatever had any impact on sort of the types of returns or the rate of return that you might be able to get on new build?

Yes. On the new build, there's a couple of things. First of all yes there have been some about some potential new building projects which are all the projects we generally were put on the site because of the COVID situation. But these are just discussions. But I would say that generally we have all seen that the liner companies and ship-owners have shown a lot of discipline and in new building ordering over the last quarters which is something positive for the whole sector. Now as far as we are concerned, we have been traditionally doing both second-hand deals and new building transactions. We have two more new buildings to be delivered to us within the next couple of quarters. And this is part of our business. In any case as far as we are concerned, our strategy it is the same. First of all, we do try to cover our downside risk to make sure that the fundamentals of the dealers are solid that the residual value risk assumed by us it is something that it is within our risk tolerance levels. And of course the -- and of course in the end there needs to be some upside and some return on our equity. This has not changed as far as we are concerned. The fact that fast change is that there is a lot of discipline that we have a very low order book for which today especially it is very thin for like 2022 and it takes almost two years to build a containership vessel. And, however, our strategy of looking both at secondhand ships and take new buildings with the same risk profile like in the past it has not changed it is exactly the same.

Okay. And just to follow-up quickly with that. Almost everything that you've done in the last few years has been on a stand-alone basis not part of your York joint venture. To the extent that we're looking forward is that what we should expect that effectively you're incrementally adding solely on the part of Costamare?

Look, the last transaction we did, you're right the 5,000 to 10,000 TEU ships with Yang Ming, yes, they were on a stand-alone basis. However, we do have an excellent relationship with York, which still continues. And this is a matter and the subject of discussion. So York has been our partner. We've done a lot of this together with your York. For instance we did with York in the past the five 14,000 TEU vessels. We have done two 3,800 TEU ship new buildings chartered to Maersk. So it depends on the circumstances. This is something that could be done with York. However, if York does not want to participate, of course, we do have the means to do it on a stand-alone basis. I think this is an additional option that is in the table, but it doesn't mean that we may not do the deal 100% at the Costamare level like we did in the past.

Okay. And then last just for my modeling purposes, can you maybe walk through what the remaining CapEx is on -- for the fourth quarter and then the first half of 2022 for the new buildings?

Yeah, for the -- we still have to accept the delivery of two 13,000 TEU new buildings, which will be delivered the latest within the second quarter of next year. The remaining equity CapEx commitment because those ships are fully funded from a debt perspective the remaining equity CapEx committed for Costamare is close to $12 million. So this is a very lucrative [ph], and this is why we mentioned that like we have minimal CapEx commitments. So we said too many -- sorry?

What is it all-in though? Sorry including debt, just debt and equity?

Look, we have not disclosed the acquisition price for those vessels. And this is the reason you seem a bit skeptical. So it's why I'm mainly discussing our equity CapEx commitments of $12 million in aggregate for the two remaining new buildings. So it's like $6 million per vessel, which is nothing for the size of the company and for our cash balance.

Okay. That’s it. Thanks, Greg.

Thank you. Thanks, Ben.

[Operator Instructions] At this time, I'm showing no further questions, so this will conclude our Q&A session. I would like to hand the conference over to Mr. Zikos for closing remarks.

Thank you very much for dialing in today and for your interest in Costamare. We are looking forward to speaking with you again during the fourth quarter 2020 results call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.