Costamare Inc. (CMRE) Q2 2022 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 2022 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, Thursday, July 28, 2022. 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. During the second quarter, revenues reached approximately $290 million and adjusted net income more than doubled to $119 million compared to $58 million for the same period of last year. As of quarter end, cash balances stood at around $700 million and total liquidity, including undrawn credit lines, was above $850 million. Over the last months, we executed on our previously announced share buyback program buying $60 million worth of common shares. At the same time, we did conclude a 5-year syndicated loan facility of $500 million, proactively refinancing the indebtedness of 16 vessels and significantly reducing our cost of funding at competitive terms. Regarding the market, congestion and pressured supply chains remain challenging as we enter the second half of the year. On the container market, asset values and charter rates remain at healthy and historically high levels as also evidenced by our latest fixtures. On the dry bulk market, rates have recently been under pressured but still remain at profitable levels, especially for owners who entered the market the year before. We view any potential softening of asset values as a compelling buying opportunity as we feel comfortable with the long-term supply and demand dynamics of the sector. On the back of our increased liquidity, we are actively evaluating new investment opportunities in the shipping sector that have the potential to provide enhanced returns at acceptable risk levels. Turning now to the slide presentation. On Slide 3, you can see our second quarter results, which was the best Q2 on record since our listing. For the quarter, net income was $114 million or $0.92 per share. Adjusted net income was around $119 million or $0.95 per share and our liquidity is up almost $300 million year-over-year to $854 million. On Slide 4, you can see an update on our financing arrangements. We closed $0.5 billion facility refinancing 17 vessels with 12 U.S., European and Asian financing institutions. The new facility increased our liquidity by $200 million, reduced our cost of funding significantly and extended the maturity of almost all the refinanced vessels, while maintaining our corporate leverage at a very low 24%. We also repurchased 4.8 million shares for around $60 million. Slide 5. Our revenue days are 100% fixed for '22 and over 95% fixed for 2023. We also forward fixed 2 container vessels at $58,500 per day per vessel for a period of 3 years, starting in the first half of 2023. We continue to fixture our dry bulk vessels in the spot market, fixing 27 vessels since our last release. Finally, we sold one dry bulk vessel, The Thunder, for a capital gain of around $3.5 million. Slide 6. The containership charter market remains at very strong levels. The dry bulk market is still at healthy levels, and the order book remains low as current rates are well above historical average. Finally, we continue to have a long, uninterrupted dividend track record boosted by strong sponsor support. Looking at our leverage and liquidity. Our liquidity has increased significantly, while our leverage continues to trend down. This liquidity gives us the ability to look for opportunities to grow the company without restricting our balance sheet. Slide 8. You can see that our containership fleet has a current backlog of $3.3 billion with a duration of 4 years. We are fully fixed for 2022, 95% fixed for 2023 and 84% for 2024. Revenues come from a diversified list of first class charter vessels like Maersk, MSC, Evergreen, ZIM, COSCO, Yang Ming and Hapag-Lloyd. On Slide 9, you can see the second quarter 2022 snapshot. We had an average of 118 vessels during Q2, up 65% year-over-year. Our adjusted net income was $119 million or $0.95 per share. The adjusted figures take into consideration noncash items like the accrued charter revenues, accounting gains from asset disposals and other nonrecurring items. Turning to Slide 10 and the containership market overview. Rates for vessels above 2,500 TEU continue to remain at historically high levels. The commercial containership fleet also remains fully employed. Slide 11. Here, we're discussing the dry bulk market where rates have come off slightly from the seasonally strong first quarter, but do remain well above cash breakeven levels. Finally, the dry bulk order book is 7.2%, a very low figure historically, which translates into modest growth for at least the next 2 years. With that, we conclude our presentation, and we can now take questions. Thank you. Operator, we can take questions now.

[Operator Instructions] Your first question today comes from Omar Nokta with Jefferies.

I just wanted to ask just about the containership market and how things have been developing there recently. And maybe just first off, just on the newbuildings that you had that were canceled earlier this month, those 6 ships. Can you give a bit of color as to what happened causing you guys to go ahead and terminate those charters -- sorry, those contracts altogether.

Okay. We talk about 8 containerships. This is what we discussed that we had ordered [ 4 13,000 TEUs and 4 15,000 TEUs ] that had like charter coverage upon delivery of the vessels. We did cancel them. But for legal reasons, for the time being, I cannot say anything more over and above what we mentioned in our 6-K filings. We did terminate the contracts because the shipyard has been in default. But apart from that, I cannot say anything more at this stage at least.

Okay. That's fair. And I guess those ships were secured, right, with some long-term charters on their delivery.

Yes, yes, those ships, each one of them upon delivery had a 15-year charter cover with major liners.

Okay. And do you think there's an opportunity or a chance to replace those? Have you had those discussions with the customer? Is that something you'd like to do to find a different way to...?

No, no, this second question. This is something we would consider. For the time being, where asset values are for the newbuildings, this is something we would think twice. I mean normally, we don't like ordering at the peak of the market or like we don't -- like we don't like over ordering and bring the market up. So where today newbuilding prices are, in today's environment, I think this is something that doesn't make sense for us at least. In the future, of course, if there is some softening in the market in newbuilding prices, this is something we would consider, again, on the back of a time charter which is good enough in order to amortize our investment.

Yes. So definitely. No speculative ordering only against the...

But even if a newbuilding project today, not on a speculative basis but on the back of long-term charter, where asset values are. This is something we wouldn't do today because even if you have a 7- or 10- or 15-year charter, you are still ordering at the peak of the market, and try to be countercyclical. So this is the reason we have not ordered newbuildings at this point.

Okay. And maybe just one final one just on the dry bulk investment. It's clearly -- it's proven, I think, beneficial and profitable. Any updated thoughts on where the dry bulk fleet sits long term? Do you see -- any thoughts that you can give us on maybe a spin-off potentially or a gradual sell-down of that fleet? Or do you think that becomes a permanent part of Costamare going forward?

I think, look, those like ships, they were bought like last year at prices which are much lower compared to today's market as you rightly pointed out. It's around 46 vessels. We sold one for a capital gain of $3.5 million. But from a strategic point of view, this is a long-term investment on dry bulk ships. And I think those complement quite well the containerships that we have. So starting from the point at the peak of the market, that's an inflated market level, we didn't want to continue investing in containers. The dry bulk investment last year proved to be quite the right call. But we're here to stay in the dry bulk business. And depending on market conditions, this is something we would examine to also grow the dry bulk business. But it's subject to market condition. It's subject to asset prices. This is pretty much if there's nothing else that's holding us back.

The next question comes from Ben Nolan with Stifel.

I had a couple maybe capital allocation type questions. You guys look to have been pretty busy in the quarter on buybacks. What was it, 3-something million shares, quite a lot. Although -- first of all, just maybe to help me out, the share count didn't really move much. Did you buy them all at the end of the quarter or something? Is there a reason why that didn't change the share count?

Yes. I mean I think most of them they were bought at the quarter end. And as per accounting standards, we take the average shares during the quarter. But what we can do is that we can send you the sort of share count schedule. So you can see exactly how we come up with this share count figure right now.

Okay. Do you have just any quick number as to how we should model it for 3Q?

For Q3, yes, I mean in total, look, we have bought like, I think, 3.8% in total of shares outstanding. I think we haven't bought the last couple of weeks. So I mean, for Q3, it should be the share count as of June 30. But let us get back to you with a very detailed schedule. This is not a...

Okay. That's helpful. I appreciate it. And then as it relates to the capital, obviously, you're buying back shares. You don't, at this point, have any CapEx. You're generating lots and lots of cash flow and leverage is pretty reasonable. You did pay a special dividend a little bit earlier this year, a year ago. You increased the dividend a little bit. Are you thinking about the sort of normalized run rate differently? Or do you think that the company can permanently support a higher dividend payout than where we're currently at?

Look, from a pure cash perspective, we can support a higher dividend. You saw that like we have a cash balance of $700 million, right, and contracted cash flows of north of $3 billion or the dry bulk -- at least from the containers and all the dry bulk vessels. In today's environment, they are all highly profitable because they have low cash breakeven, we bought them last year at much better price. So from a cash perspective, we are more than capable of [indiscernible]. Now, as you mentioned, we paid a one-off special dividend. We did raise the dividend before that. And we have bought back shares. Whether we're going to be buying more shares back, we have a program of $150 million. We used like $60 million worth for the time being. The program is still there. We'll see. This is -- this has to do with where we will find acquisition opportunities or new projects in the market. Our main goal is to continue investing our excessive cash from operations in new business, which in turn they're going to be producing more dividends in the future. So it remains to be seen what we find in the market. As I mentioned in my commentary, we are quite actively looking at a lot of opportunities. So first, let's see what happens there. And then this is something to consider as well. But I think that we have increased the dividend. We have the payment of the one-off dividend. We bought back shares. We've done quite a part of it. Let's see how we're going to continue investing accretively the cash from operations.

Okay. That's helpful. And then that leads sort of to my last question. You said that you would be opportunistic with respect to adding to the dry bulk fleet if prices were better. That said, lately, in the last, I don't know, 3 quarters or so, you have sold a number of the containerships, even sold one of the dry bulk ships. Any -- and I'm sure that you have gains in all of those dry bulk ships at the moment and all the containerships. Any thoughts of continuing to do that? Or are you pretty much done what you wanted to do on the sales side?

For the containers, we're pretty much done. We sold what we felt it made sense to sell. For instance, we sold ships 2000 built, 6,500 TEUs and we sold them at prices like $75 million or more each. So I think in that respect, we are pretty much done. Of course, subject to market conditions, you can never predict the market. But based on what we know today, I think on the containership fleet, we are pretty much done with the disposals. On the dry bulk, we sold like one vessel for a capital gain, but I think for the dry bulk we're here to stay. So it was not like one-off investment, which we're going to dispose of soon. Actually, should we see some softening in the market in terms of asset values and if we feel that it does make sense from a capital allocation perspective, we will be more than willing to expand our footprint in the dry bulk business. It's all subject to market conditions, but disposal of vessels -- I think for the time being, also in the dry bulk, there may be a couple of exceptions, a couple of smaller vessels we may decide to sell for the profit or something. But generally, the dry bulk it is here to stay. And subject to market conditions, our wish would be to expand it further rather than to shrink it.

The next question comes from Climent Molins with Value Investor's Edge.

You have started to use the share repurchase authorization, buying back around 3.8% of the outstanding, which seems like an optimal capital allocation call given the discount your shares are trading at. Is there any interest to initiate the tender to take large blocks?

No. For the time being, we have a share repurchase program of up to 150 million. We haven't used half of it yet. So I mean, we'll see. I think should we decide to buy back more shares, this is something we would go to the program, I guess, for the time being. Now of course, if down the road, we think if we wish to continue with our share buyback and there are some more efficient ways to do it, we're going to consider them. But for the time being, we did it on a plane vanilla basis through this authorized by the Board program.

That's helpful. And your preferred shares have been trading above par. And I was wondering if there is any appetite to call any of those shares. How do you view the preferred on your present capital structure?

So the preferred shares, if I understood it correctly. In our capital structure today, in our balance sheet, they are being treated as equity because they are truly preferred shares without -- they are sort of truly perpetual without any step-ups and we can redeem them anytime we want, partly or in total after a noncall 5-year period. So they are treated as equity, if that's the question. Now they are trading all above par, above the $25. We have authorized a preferred share buyback program of up to $150 million, which obviously where they are trading today. We have not utilized it. In the past, we bought back a small amount of like preferred shares. Today, where they're trading, it doesn't make sense to buy them back today. We'll see.

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

Thank you for dialing in and for being with us today. We look forward to speaking with you again during our Q3 results call. Thank you.

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