Costamare Inc. (CMRE) Q4 2022 Earnings Report, Transcript and Summary

Thank you for standing by ladies and gentlemen and welcome to the Costamare Inc. Conference Call on the Fourth Quarter 2022 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 Wednesday, February 8th, 2023. 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. 2022 has been a record year for Costamare. With a fleet of 117 vessels including 45 dry bulk ships, the company generated net income of about $520 million. As of the end of the year, liquidity stood at around $970 million. On the containership side, 2022 was a unique year with the first half drawing upon favorable market conditions with strong demand and logistical disruptions continue to impact the sector, while during the second half, charter rates and asset values normalized as a result of reduced cargo demand and the return of capacity previously tied up by congestion. We chartered the total of 16 secondhand containerships during the year, which added incremental contracted revenues of more than $550 million. Total contracted revenues amount to $3.2 billion with a weighted average remaining time charter duration of about 4.2 years. We are above 95% covered for 2023 and we have proactively arranged long-term employment on a forward basis for a number of containerships coming off charter between 2023 and 2025. At the same time, we are in the process of disposing of some older tonnage at prices fixed during a tight market environment. On the dry bulk side, the new dry bulk operated platform previously announced commenced operations during the quarter. With a negative commitment of up to $200 million, our goal is to grow the business on a prudent basis, realizing healthy returns for our shareholders. On the back of our increased liquidity and containing charter coverage, we are actively pursuing new investment opportunities in the shipping sector that have the potential to provide advanced returns at acceptable risk levels. Moving now to the slide presentation. On slide three, you can see our annual results. 2022 was the best year since our listing. For the year ended, net income was above $520 million or $4.3 per share, while adjusted net income was around $400 million or $3.3 per share. Our year-end liquidity is up by almost $420 million year-over-year to around $970 million. Slide four, during the previous quarter, we announced the setup of a new venture called Costamare Bulkers Inc. CBI will charter in and out dry bulk vessels enter into COAs and trade FFAs and bunker swaps. Until now, we have already invested $100 million with a commitment for another $100 million. Over the last months, we fixed 23 vessels and enter into numerous COAs and FFAs. On slide 5, you can see an update on our refinancing arrangements, which amounted roughly to $560 million without any material increase in leverage. Most of them were coupled with significant improvement of the funding cost and extension of maturities. Our corporate leverage remains below 35% and we continue to maintain a strong balance sheet. Slide 6. We continue to charter all our dry bulk vessels in the spot market chartering 37 ships since our last earnings release. On the container side, our revenue stays at 96% fixed for 2023 and 85% for 2024 while our contracted revenues are up to $3.2 billion with the TEU-weighted remaining time charter duration of above four years. Lastly, we fixed 16 containerships with incremental contracted revenues of more than $0.5 billion. Slide 7. The containership charter market has normalized in the second half of the year mostly due to reduced cargo demand and the return of capacity previously tied up by congestion. The dry bulk market has also weakened and the FFA market indicates significant strategy signs, especially from Q2 2023 onwards. Finally, we continue to have a long and interactive dividend track record boosted by strong sponsor support. On slide 8, our liquidity has increased significantly year-over-year starting at around $970 million. This liquidity gives us the ability to look for opportunities to grow the company on a healthy basis. Moving to the next slide. Here you can see a snapshot of our fourth quarter 2022 results. We had an average of 115 vessels and our adjusted ending about $75 million or $0.61 per share. Our adjusted figures take into consideration the following items the good charter revenues, accounting gains or losses for passive disposals impairments and other non-recurring or non-cash items. On the last slide we're discussing the market. Moving to slide 10. Box rates have normalized from historically high levels. The latest conferencing pictures that have been concluded have been consulted periods at a lower rate. The idle capacity has reached 2.6%. On slide 11, you can see the recent dry bulk market trends where rates have been under pressure. The order book is at 7.5% of the total fleet and new ordering continues to be subdued. With that, we can conclude our presentation and we can now take questions. Thank you. Operator, we can take questions now.

[Operator Instructions] And your first question comes from the line of Chris Wetherbee from Citigroup. Please go ahead.

Yes, hi. Thanks for taking the question. Maybe we could start on the container shipping side. I was curious about your take on discussions with charterers. So I know you have a degree -- a strong degree of coverage as we move through 2023. But in the instances where you've been having conversations with some of your customers, can you give us a sense of sort of what that dynamic feels like? Obviously we heard from Maersk earlier this morning and I think broadly speaking overall box rates have fallen precipitously. So I want to get a sense of how we should be thinking about sort of charter development over the course of the next couple of quarters or maybe as we think about the next couple of years?

Okay. Thanks. Thank you for that and good morning, Chris. So a couple of things. Look, the softening in the charter market, both in charter rates and box rates, it is something that was expected. At some point the congestion is then we have also seen reduced cargo demand for a lot of reasons, but it's got to be inflation-related or it may have to be with the financial targeting, et cetera. Now, as you said, we are pretty much close to 100% fixed for this year, and 85% for the year after. We don't have a lot of ships opening and the trend we see is that apart from the fact that charter rates have been falling, at the same time the period of the picture has been shorter and shorter, and there are extension options that we see back again for two to three months charters option. Now, I cannot predict how the market will go. All I say that, for the time being, we have not seen asset values being softening at the same level, although there is definitely some correlation, but like we haven't seen it yet. So regarding charter rates, first of all, we feel more than comfortable with the quality and the credit standing of our charterers. Also, considering the fact that, they have been extremely profitable over the last couple of years. And secondly, from our side, you saw our liquidity. So in case of like, when we feel that asset values in the containership market are going to be at levels, which we find interesting. I can tell you that, we might be there as a buyer. But for the time being, we pause, we sit and wait.

Okay. Okay. That's helpful. And then I guess, I just wanted to come back, and ask a little bit about what your thoughts are in terms of deploying capital in the market, what maybe is the most attractive area in your opinion currently? Obviously, you have ample liquidity as you highlighted on slide 8. So kind of curious where you think the best use of that capital will be, or does it make sense to kind of sit back a little bit and kind of see how the broader macro plays out?

Yeah. Look, part of the answer is what I just mentioned is that, when we see asset values on the containership side being correlated to charter rates today, and we would look at it again. But this sort of may take some time, both for second half and also for new building. So this is one area that, I guess, we're going to be active, again, should the market prices justify that. The second applies also for the dry bulk fleet. So still, we don't think that asset values have reached a level where they have become of interest again. But should this be the case, we will deploy capital buying ships at prices, which we feel makes sense, and it's going to position ourselves in a quite opportunistic timing. So it's ship acquisitions both dry bulk and containers. As you've seen we have started the dry bulk trading platform that, we have allocated up to now $100 million that's going to go up to $200 million. This is another area we have been investing. And finally, we are looking at some other initiatives, which have not materialized yet. So, I cannot disclose them for two reasons, both for legal reasons and also because they're not material yet so they're not concluded yet. But we are working on some other initiatives, where we feel that part of our liquidity could be deployed as well. However, if we don't see asset values coming at levels that make sense both on the containership side, and also in the dry bulk side, simply we will sit back and we're not going to be buying any ships. I have to remind you that, we didn't put any new building orders at the high prices we saw in the containership market over the last couple of years, simply because we felt that asset prices were prohibitive, even if the charter rates offered were at high levels as well. So we will take our time. We are patient when like we feel we should be and we will wait.

Okay. That's helpful. I guess, maybe one final for me before I turn it over. Just in terms of the trading platform, are you going to need to maintain a higher degree of liquidity in the business in terms of capital reserves to be able to manage the risk potentially associated with that? I guess, kind of, curious about how that might influence how you think about liquidity and cash balances?

Yeah. The way we see it now, our equity there it's going to be up to $200 million. And that's it. Of course, if the business grows and if you see more potential, I don't think you would be surprised that we can go higher. But what we have today in mind and let's see how it goes. But what we have today in mind is that those $200 million are going to be more than enough in order to cover our liquidity needs in this business and manage our exposure and our market risk. But as I said, if this thing is something that we feel make sense and we feel more comfortable with the whole setup. And we see potential in that market. The $200 million is not a limit. It is just what we feel we should allocate today. We could easily go north of that if it is justified.

Okay, okay. That's very helpful color. Thanks for the time this morning. Appreciate it.

Sure. Thank you. Have a nice day. Thank you.

Next question comes from Omar Nokta with Jefferies. Please go ahead.

Thank you. Hi, Greg. Good afternoon. Thanks for the update.

Hi, Omar.

Hi. I just wanted to follow-up maybe on the last discussion about the dry bulk fleet and the trading operation. You've obviously moved very quickly here over the past 18 months building up the owned asset base and now you've chartered in those 14 capes and the nine Kamsarmax, which you referred to in the release. And I guess from the -- maybe the perspective of risk or maybe just duration, how should we think about those vessels? Are these short-term charters? Are they longer term? How should we be thinking about those? How they sit in your portfolio today and for how long?

Yeah, the ships target in the trading platform, which is asset light. First of all, not all of them have been delivered most of them will be delivered over the next couple of quarters. But the charter period could be between two to three years. However, most of them are on index. So strictly speaking when you have a ship charter on index, there is no real exposure, because it is an index you pay what the market is paying. And you get the COA based on market terms. However, having said that in the future we may have ships with a fixed rate, again for period. And it's going to be a combination of both I guess. But most of those vessels today to answer your question, they are for the period rating up to three years. And most of them are on -- or in index based charter rate.

Okay. That's helpful. So good to know that they're index based. And then you do have -- you were saying you have the COAs basically covering them on the other side where you can capture effectively spread?

Correct. We have two ways. And at the same time, we have started employing FFAs as well both in order to hedge and also in order to position ourselves. So we've done FFAs. We've done COAs, especially for the vessels that are going to be delivered now. We have 23 vessels chartered in, most of them on index. And for the bank exposure, we will also be doing bunker hedging.

Okay. Thank you. And then just on the 23 ships that you are about to have in the fleet is that kind of, a -- is that the right size it needs to be or is that maybe a starting point? Is there a certain number given the liquidity or the capital you're putting forth into that operation? What could be the size of that trading fleet?

Yes. No this is a starting point and those ships that were committed over the next couple of months, I would say. I think sooner rather than later, we could easily reach the threshold of the 50 ships being operated. And of course subject to market conditions, we could go to 100 or 250 easily. This is why I said earlier that, if we feel it makes sense the $200 million of total equity commitment, could go higher because at some stage you need to have a meaningful size in this business as well. So it will definitely be 50 higher against sooner rather than later. And in the future it could also -- it could also go to 100 150 or even north of that.

Okay. That's very helpful. And maybe just one quick follow-up just on the reference you made to the -- a couple of initiatives you were looking at that you can't comment on. Can we assume that those were maybe outside of dry bulk and containers?

Well, it's going to be in shipping. I cannot comment whatever I say -- if I say, it's going to be within dry bulk and the containers I'm giving you partly an idea if I say that it will not the same thing. So I'm afraid I cannot comment at all it's going to be shipping related. Of course, it's not going to be aviation. But this is something both for legal reasons and for the simple reason that is not concluded yet. I cannot comment more on that.

Okay. I appreciate Greg. I will turn it over.

Sure. Thank you.

[Operator Instructions] Your next question comes from Climent Molins with Value Investor's Edge. Please go ahead.

Good morning. Thank you for taking my question.

Good morning.

You've been clear you want to pursue additional acquisitions if attractive opportunities arise. And given your solid financial position I was wondering how do you plan to balance this additional spending with potential shareholder returns, especially, considering the significant discount to NAV shares are trading at?

Yes. It's a question about capital allocation, which comes quite often. And this is the fair question. I cannot rule out share buybacks and we did in the past. And we also increased the dividend in the past and we also had a one-off extra dividend payment. At the same time now for the time being, however, if we feel that the asset values make sense and as I mentioned earlier justify further acquisitions either in the containership segment second part of buildings or sort of, dry bulk vessels, this is something we would look very, very carefully without excluding share buybacks for example, but we follow the market for timely acquisitions should circumstances change.

Make sense. Thanks for the color. That’s all from me. Thank you.

Thank you. Thanks a lot.

This concludes today's question-and-answer session. I would now like to pass the floor to Mr. Zikos for his closing remarks.

Thank you very much for your interest in Costamare and for dialing in today. We look forward to speaking with you again during our next quarterly results call. Thank you.

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