Costamare Inc. (CMRE) Q2 2021 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 2021 Financial Results. We have with us Mr. Gregory Zikos, Chief Financial Officer of the company. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, July 28, 2021. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read Slide #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. The container market rebound that has begun in the second half of last year has continued into the first half of this year, drawing strength from favorable supply and demand dynamics. Strong consumer demand, low inventory levels and supply chain constraints have all contributed to record charter rates and longer charter durations. All our containerships chartered during the quarter have been fixed at increasingly high levels of hire. On the dry bulk side, we are pleased to report the acquisition of 21 additional vessels since we first announced our entry into the sector. Our dry bulk fleet comprises of 37 vessels in total between 32,000 and 85,000 deadweight with an average age of 10 years. Up to now, 14 ships have been delivered, with the rest of the fleet expected to be delivered by year end. The dry bulk acquisitions result from our decision to invest in this liquid sector, where supply is limited by a low order book and demand is being driven by increased infrastructure spending and commodity consumption. Supported by contracted revenues of $3.3 billion at an average time charter duration of more than 4 years from our containership fleet, we have 15 containerships coming off charter over the next 18 months and 37 dry bulk vessels operating in the spot market, favorably positioning our company, should the currently strong market conditions continue. Moving now to the slide presentation, on Slide 3, you can see the highlights. Net income for the quarter is $82.8 million and the EPS is $0.67. Adjusted net income is $58.3 million, up 84% compared to the second quarter of last year and adjusted EPS is $0.47, increased 81% relative to the year ago period. We have decided to expand into the dry bulk sector by signing commitments for 37 dry bulk vessels and we have already accepted delivery of 14 ships. Remaining 23 ships are expected to be delivered between now and the end of the year. Moving to the next slide, we have taken delivery of 3 more containerships during the quarter and we expect to take delivery of 2 more vessels between now and the end of the year. Incremental revenues from these vessels are around $200 million. We have also concluded the sale of 1 vessel and expect the sale of 2 other ships to be concluded within 2021 with a total estimated capital gain of around $22 million. On Slide 5, you can see our new financing arrangements since our last earnings release. In total, we have concluded financing of about $650 million and we have a new financing commitment subject to documentation of $150 million. All our containership and dry bulk processes that have not yet been delivered have funding in place. We do maintain a strong balance sheet with liquidity of about $600 million, market value based leverage of 31% and no meaningful debt maturities until 2025. On Slide 6, you can see our new chartering arrangements. We have entered into new or extended the charters of 7 vessels at much higher levels. On average, the new charters were fixed at a rate of 2.1x higher with a longer average duration. Our most recent fixtures, the Cosco Guangzhou and the Cosco Ningbo were done at $72,700 per day per vessel for 3 years, more than 2.4x higher than the current rate. In addition, we have a total of 15 containerships coming off charter over the next 18 months. Moving to the next slide, on Slide 7, you can see the chartering of our dry vessels. We have chartered in total 7 ships at very healthy rates. On top of this, we have also fixed 4 vessels whose delivery is expected to be delivered to – is expected to occur within 2021. Slide 8, the containership charter market has continued to rise on the back of positive supply and demand fundamentals. The idle fleet reached 0.7% in July, indicating a fully employed market. The dry bulk market has also reached levels not seen since 2010 as demand for commodities is surging. We have also paid our 42nd dividend in April and we will pay our 43rd dividend in the coming quarters. Slide 9, on this slide, you can see the second quarter 2021 results. The company generated revenues of $167 million and adjusted net income of $58 million. Based on the above, the second quarter adjusted EPS is $0.47, up 81% year-over-year. Our adjusted figures take into consideration the following non-cash items: accrued charter revenues, accounting gains or losses from asset disposals, prepaid lease rentals and other non-cash charges as well as changes in the fair value of equity securities. On Slide 10, you can see our capital structure. Our leverage is comfortably at about 31% based on current market values. EBITDA over net interest is at 6.2x when our governance, have a minimum requirement of 2.5x coverage. On Slide 11, you can see distribution for our containership fleet. Our revenue comes from first class charters like Maersk, MSC, Evergreen, Cosco, Yang Ming and Hapag-Lloyd. We have $3.3 billion in contracted revenues at the remaining time charter duration of about 4.3 years. On the next slide, we discuss the containership market. Charter rates have significantly improved since Q2 2020 across all vessel sizes. Box rates have increased by approximately 300% on a yearly basis. Slide 13, the idle fleet is at 0.7% from a high of 12% 1 year ago. The order book has risen to 21% as new ordering has accelerated over the past quarters. It should be noted, however, that it takes close to 2 years to build a new vessel and the majority of newbuilding vessels that have been ordered will not be delivered until 2023 onwards. In the last two slides, we discuss the dry bulk market. As shown on Slide 14, charter rates have significantly improved since Q3 2020. Although asset values have been trending upwards since late ‘20s, they have lagged the increase in charter rates. On the last slide, you can see that the rebound in consumer spending, combined with government stimulus, has created positive momentum in the seaborne commodities trade. At the same time, the order book for the dry vessels remained at historical low levels, especially for the sizes that we have invested in and fleet growth is expected to decline over the next several years. This concludes our presentation and we can now take questions. Thank you. Operator we can take questions now.

Thank you. [Operator Instructions] And our first question today comes from Chris Wetherbee with Citi.

Hey, guys. It’s James on for Chris. First question I wanted to ask was around the bulk fleet and what your ultimate plan for it might be? Is it something where you see Costamare evolving to having exposure to both markets? Do you see possible split? And if you do see a possible split, what size or scale would you want to target, just some color around how you are thinking about that would be great?

Yes. Look, for the dry bulk vessels, as you have seen, we have invested in those 37 vessels up to now. It’s mainly smaller vessels up to Kamsarmax. And this type of vessel is something we feel that it does make sense for the future. Now we cannot predict and I am not in a position to predict now whether we are going to continue our purchases in the dry bulk vessels. This depends on market conditions. Now, the second part of the question, I mean, what’s going to be happening in the future, whether this fleet is going to be split or not. I mean, again, there are a lot of options. Nothing has been decided yet. And we have both those ships over the last couple of months. Only 14 ships have been delivered. The rest are going to be delivered – the remaining 23 will be delivered until yearend. So I think it is a bit premature and there is no decision taken. One thing that I need to add, however, is that we have secured the debt funding for all the dry bulk vessels based on facilities we have already in place with European financial institutions. So regarding the delivery of the remaining 23 dry ships, the debt has already been in place and it is committed.

Got it. And just as a follow-up to that, like how do you actually see yourself balancing the investment between the two? Do you – will you actually be balancing them fairly evenly? Or do you actually see sort of more incremental investment going to bulk at this point? Just trying to understand sort of like where the incremental capital dollar will go.

Look, I think it is – this is a question of true capital allocation. We have bought those ships recently because we believe that the economics make sense. But this is a market, and in shipping, you need to adapt. So I don’t know how markets will be over the next quarters or over the next year. All I can tell you is that we are flexible. We can be efficient in executing. We have equity, and we also have access to commercial bank debt. So having all those ingredients in place, I think it’s just a question of where we feel that it’s better use for our capital. But I cannot tell you from now that we’re going to be investing so much in this sector and so much in the other sector. It’s all subject to market conditions going forward.

Got it. And speaking of market, markets are evolving one way and another. The – can you talk about the current discussions you’re having with your customers around charter terms? Are they sort of – are you seeing it evolve towards even higher rates? Are you seeing lengths pushed out, like what are the terms of which are sort of most in play and which direction are they going? Any color on that would also be great. And that’s it for me.

Yes. Look, for the containerships, we’ve seen that if you look at the latest fixtures for the sector, you will see that there is a clear trend, obviously for 5 years and also for longer periods. If you look at our latest fixtures, as an example, I would take the two Cosco vessels, which have been chartered to have a third charter, a new charter on a forward basis. And those ships will be getting $72,700 per day per vessel, compared to slightly below $31,000 that we’re getting or sort of we are getting now. And this is for a 3-year charter starting from next year. So charterers are willing to fix for longer periods, also for higher rates and also on a forward basis, meaning for ships that will be available for delivery in Q1, Q2 2022 or even later. This is what we see today. And from our side, in order to optimize our cash flows, we’re going to – we seek to charter for the longest period available at a charter rate that makes sense. Also, if you look at the latest chartering of our Panamax vessel, this has been chartered for $39,000 per day. This is a classic Panamax, 2011 build, $39,000 per day for close to 5 years. So this is what we see today. Now where the market is going to be in two, three, four quarters, we never predict the market. But I can tell you that every time in different market situation what we’re going to be doing. And for the time being, we are fixing for a longer period at the highest possible rate and also on a forward basis proactively.

Thank you.

Sure. Thank you.

Our next question comes from Ben Nolan with Stifel.

Hey, good morning, Greg. So I wanted to just make sure that I have all my numbers right. Can you maybe give – how much CapEx is remaining for the dry bulk fleet in the back half of the year based on what you’ve spent so far for the 37 vessels?

Yes. For the 23 vessels to be delivered, for the dry bulk vessels, 23 to be delivered, the debt has already been committed. So our equity CapEx requirement is going to be in the region of $100 million, $100 million to $120 million, depending on the leverage. We can go 50%, 55% leverage, we will see. But I think the $100 million to $120 million equity CapEx commitment for the remaining of the dry bulk vessels, this is the right estimate. Now for the containership vessels that sort of we have a capital to be delivered, there is no incremental equity CapEx commitment. So for the whole fleet, it’s only this $100 million to $120 million, which is going to be covering all the 37 dry bulk ships.

Okay. That’s very helpful. But what’s the total – like I’m trying to get a sense of how much you’ve spent in total for all 37?

Look, we haven’t given a total number. And – but I mean if you see that sort of on average, these are 10-year-old ships close to, I would say, 50,000 deadweight. You can sort of get the picture, I mean, how much it’s going to be. But I mean, we don’t give a full number. It’s definitely more than $0.5 billion debt and equity. But I mean we don’t give the exact number.

Okay. That’s fine. We will see in time, right, with the filings. But the – to that end, though, it sounds like you’re still very much in the market to continue to build on that fleet. So 37 is not sort of the terminal number here yet, by any means. Is that a fair assumption?

Look, this is subject to market conditions. So as I mentioned earlier, we cannot predict how the market is going to be over the next quarters. And it’s also a question of capital allocation. Because, of course, we are looking at dry bulk vessels, but at the same time, we have also been actively looking in the containership sector. Let’s not forget that. And during the last quarter, we also talking from the beginning of the year, we did acquire a substantial number of containerships and accepted delivery of a substantial number of vessels as well. For instance, I can mention the five 11,000 TEUs where like – we bought the shareholding of York out of those vessels, plus some other acquisitions. So, it’s all subject to market conditions. We are flexible. We have the cash. We have equity. As I mentioned, we have access to commercial bank debt. All those deals have been fully funded from a debt perspective for those 37 vessels. So as long as we have debt and equity in place and we can be flexible and efficient in executing, I think it’s all upside. But I cannot tell you from now how many ships. It depends.

Okay. And switching gears a little bit over to the container side of the business, obviously, you’ve been pretty busy there. There have been, as you highlighted, a bunch of new vessel orders that really to me is almost shockingly number of new vessel orders. But obviously, the liners are – have still been very much in the market to do that and find people to own the ships for them. Where do you stand on that? I mean are you guys interested in having those conversations or the economics at all in a place that would get you to be active there?

You referred to newbuildings or to say...

Newbuilding. Yes, yes, newbuilding.

Yes. Yes, we look at newbuildings. And traditionally, we have been doing a lot of newbuilding transactions over the last years or even decades. Yes, we will look at newbuildings. But we need to make sure that, first of all, there is going to be charter coverage in place. And the numbers need to make sense from a return perspective. So, of course there have been a lot of deals. But I mean we need to make sure that the returns are such so that the transaction is going to be justified. But yes, we do look at newbuildings like we have always done. I think if there is something, of course, we will let you know, but it has always been an area Costamare has had an interest. The thing is that the transactions we have seen up to now, I think that the returns that from our side we saw didn’t justify sort of ending into those contracts.

Right. And that was really my question. So far, relative to, let’s say, other opportunities, the economics on a newbuilding transaction right now or Q2 – Q4, haven’t hit sort of your – haven’t been the best use of your capital. Is that sort of how you have looked at it?

Look, we believe that, first of all, we will continue looking at the newbuildings, this is for sure and sort of depending on the deals we see, we will decide whether we will proceed or not. At the same time, the dry bulk vessels we have got as you have seen, of course, it is in the spot market, but those ships today, they are getting $25,000, $28,000 per day, and they have a very low breakeven. So, I mean we definitely think that these are deals that do make sense from a pure returns perspective. And also, I need to highlight here that we have the dry fleet of the 37 vessels. And we can be opportunistic there based on like where we feel the market will be heading. At the same time, let’s not forget that we have the buffer of the $3.3 billion of contracted revenues from Costamare from the containerships with time charter duration of north of 4 years. And we have been chartering on a forward basis ships at very high rates, which definitely provide a buffer and also a downside protection. So, the downside protection, it is there. And at the same time, opportunistically, we are trying to enhance our equity returns also with the dry bulk fleet.

Yes, for sure. Alright. Well, one last one. I mean you talked to sort of the order book on newbuildings starting to creep up, but it doesn’t really take effect until 2023. But as you do look out to 2023, and the order book of being over 20% now, is it getting to a level where you are starting to be a little bit more cautious or think that maybe a correction is possible at some point?

I cannot – look, I cannot predict the market. Now, the 20% order book today, of course compared to the 5% or 7% we had a couple of years ago, it looks a high number. Compared to the 60% order book we have had in 2008, it’s low. It’s all supply and demand. We cannot predict. If it is a newbuilding transaction with a charter cover that we think makes sense, we will definitely consider that.

Okay, alright. Thanks Greg.

Thank you.

Our next question comes from Omar Nokta with Clarksons.

Thank you. Hi, Greg.

Hi, Omar. Good morning.

Good morning. Yes, just wanted to ask maybe a little bit more about the dry bulkers. And I know you have talked about it with the last two questions. But just, you mentioned basically acquisitions going forward are going to be based on market conditions. I guess if we kind of think about conditions as they are today and if they were to stay, is there sort of a critical math that you want to achieve in the dry bulk business? Are you comfortable with 37 being the number, or have you had any internal discussions about a certain target number that you would like to get to sort of feel like you have got a very good base of operations to work with?

No, we don’t have a specific target number. We just look at asset values, charter rates, and we take a view about the sector. If you have a predetermined target, let’s say, 50 vessels, 70 vessels, 100 vessels whatever that is, then in order to achieve that, at some point, you are not going to be looking at the transaction economics. You are going to be just looking at ways to meet your target. So, if it’s something that makes sense, we might continue. If not, then we don’t have to grow, we will pause. The same thing we did for containers. We did a lot of acquisitions in the last quarter of last year and the first couple of quarters of this year. And then we stopped because we felt that from a capital allocation perspective, it made more sense to invest in the dry bulk fleet. But we don’t have any predetermined growth rate, neither for the containers nor for the dry bulk. And there is no minimum growth rate target also for the whole fleet, for the whole company.

Okay. No, that’s fair. And I understand that. And then what do we think then about back to the container business. Some of the – you have sold a handful of older, smaller ships, should we continue to think about the – how should we continue to think about those sub-2,000 TEU vessels? Are those, you think, going to be monetized here in this market?

Look, if the ships, especially the smaller ships, older age, if they continue to be chartered at healthy rates that makes sense, we may not dispose of them. It depends. If we feel that the equity released from those disposals is going to be accretive compared to holding on to those assets and continue trading them, no, we may sell them. It’s all, I mean a question whether the equity release is going to provide these returns higher than sort of keeping the vessel continue operating the ship at today’s levels. And then take a forward view about our residual value risk at the expiry of the coming charters. This is pretty much it. But again, we are going to be very flexible. We don’t need the equity. We don’t need the cash. It’s just a matter of capital allocation. What we feel is going to be making sense for our shareholders and eventually for our equity returns. And this is the only question, but we don’t need to grow or we don’t need to sell. As long as we have no restrictions there, and as I mentioned, as long as we can be flexible and opportunistic, we are going to continue the same way.

Okay. Got it. And then Greg, finally, just how do you see the dividend evolving? Obviously, you have got a pretty deep backlog at the moment. And as you mentioned, you have got 4 years of contract feasibility. On the container fleet, I know you took the dividend up from $0.10 to $0.115. Are you guys having any discussions or just any thoughts about a further boost from here considering just how much the earnings quality is becoming?

Look, we like dividends since we own close to 60% of the company, and this is our main income from shipping. We deteriorated dividend some months ago, 15%. Now – and as I said, we discuss everything. Now the dividend is a Board decision. I am not authorized, but I think the last dividend increase was pretty recent. So the Board, every quarter, it reassesses, I mean its dividend policy. We will see. But let’s not forget that we have very recently increased it. We have used our capital for a lot of acquisitions, which we do feel make sense. We have been chartering on a forward basis containers at increased charter rates. So, I don’t see why the dividend cannot be also increased in the future. But let’s not forget that we did increase a couple of months ago. So, I think it is a bit – this discussion today, I think, it is a bit premature, at least.

Okay. Thanks Greg. That’s it for me.

Thank you. Thanks a lot.

This concludes our question-and-answer session. I would like to pass the call back to Mr. Zikos for closing remarks.

Thank you very much for being here with us today. We look forward to speaking again during our next quarter conference call. Thank you very much. Bye.

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