Capital Product Partners' (CPLP) CEO Jerry Kalogiratos on Q4 2015 Results - Earnings Call Transcript

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Capital Product Partners L.P. (NASDAQ:CPLP)

Q4 2015 Earnings Conference Call

January 29, 2016 10:00 AM ET

Executives

Jerry Kalogiratos - CEO and CFO

Analysts

Jonathan Chappell - Evercore Partners

Benjamin Nolan - Stifel Nicolaus

Ken Hoexter - Bank of America Merrill Lynch

Spiro Dounis - UBS Securities

Sunil Sibal - Seaport Global Securities

Michael Gyure - Janney Montgomery Scott

Benjamin Brownlow - Raymond James & Associates, Inc.

Operator

Thank you for standing by and welcome to the Capital Product Partners Fourth Quarter 2015 Financial Results Conference Call. We have with us Mr. Jerry Kalogiratos, Chief Executive Officer and 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 the conference is being recorded today January, 29 2016.

The statements in today's conference call that are not historical facts, including our expectations regarding developments in the markets, fleet developments, our ability to pursue growth opportunities, our expected charter coverage ratio for 2016 and 2017 and expectations or objectives regarding our quarterly distributions and annual distribution guidance maybe forward-looking statements as such as defined in Section 21E of the Securities Exchange Act of 1934 as amended.

These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of the forward-looking statements. We make no prediction or statement about the performance of our common units.

I would now like to hand the conference over to your speaker today, Mr. Kalogiratos. Please go ahead, sir.

Jerry Kalogiratos

Thank you, Jenny, and thank you all for joining us today. As a reminder we will be referring to the supporting slides available on our website as we go through today's presentation.

On January 20, 2016, our Board of Directors declared a cash distribution of $0.2385 per common unit and $0.21975 per Class B unit for the fourth quarter of 2015. The fourth quarter common unit cash distribution will be paid on February 12 to unit holders of record on February 5. The fourth quarter Class B unit cash distribution will be paid on February 10 to Class B Unitholders of record on February 3.

The Partnership's net income for the fourth quarter stood at $15.4 million, a $1.7 million improvement on the $13.7 million net income recorded in the fourth quarter of 2014. The Partnership's operating surplus for the quarter amounted to $35.2 million, which is $3.1 million higher than the $32.1 million in the fourth quarter of 2014.

Common unit coverage for the fourth quarter 2015 stood at 1.1 times. We recorded 0.3 million in profit share for the quarter generated by two of our product tankers, the Anemos I and the Amadeus as a result of the strong support environment for product tankers. During the fourth quarter of 2015 we drydocked an additional three vessels which brings the total number of drydock vessels for 2015 to 10.

We are also pleased to announce that the Partnership has secured long-term employment for five of its products tankers all on increased rates compared to the previous employment, including three MR tankers fixed for three years.

As a result of the new charters and as at the end of the fourth quarter 2015, the average remaining charter duration of our charters stood at 6.4 years with approximate charter coverage of 89% for 2016 and 70% for 2017.

As most of our remaining charter expirations in 2016 relate to product and crude tankers, we expect to be well-positioned to take advantage of the improving market conditions in these segments.

Turning to Slide 3, revenues for the fourth quarter of 2015 were $59.4 million compared to $49.7 million in the fourth quarter of 2014. The increase is mainly a result of the improving employment day rates for certain of the Partnership's vessels and the increased size of the Partnership's fleet.

Total expenses for the fourth quarter of 2015 were $38.9 million compared to $32.3 million in the fourth quarter of 2014. The vessel total operating expenses for the fourth quarter amounted to $18.3 million, $3.1 million higher than the $15.2 million in the fourth quarter of 2014. The increase reflects primarily the increased fleet size of the Partnership and expenses related to the drydocking of the Apostolos, Agamemnon, and Archimidis.

General and administrative expenses for the fourth quarter amounted to $1.3 million, compared to $1.6 million in the fourth quarter of last year. Total other expense, net for the fourth quarter of 2015 amounted to $5.1 million, compared to $3.8 million for the fourth quarter of 2014. The increase reflects the higher interest costs we incurred in the fourth quarter of 2015 and lower interest income compared to the same period.

The Partnership's net income for the fourth quarter of 2015 was $15.4 million or $12.3 million after taking into account the preferred interest in net income attributable to the Class B Unitholders and GP interest that is $0.10 per common unit.

Moving on to Slide 4, you can see the details of our operating surplus calculations that determine the distributions to our unit holders compared to the previous quarter. Operating surplus is a non-GAAP financial measure, which is defined fully in our press release. We have generated approximately $35.2 million in cash from operations before accounting for the Class B preferred unit distribution. After adjusting for the Class B unit distribution, the adjusted operating surplus amounted to $32.3 million, with common unit coverage for the fourth quarter being at 1.1 times.

On Slide 5, you can see the details of our balance sheet. As of the end of the fourth quarter, the partners' capital amounted to $937.8 million, which is $65.2 million higher than the partners' capital at year-end 2014.

This increase primarily reflects the issuance of 14.6 million common units in April 2015, which raised net proceeds before offering expenses of $133.3 million, and the net income for full-year 2015 partially offset by the payment of $122.8 million in distributions since the end of 2014.

As of December 31, 2015 the Partnership's total debt decreased by $6.3 million to $571.6 million compared to total debt of $577.9 million as of the end of 2014. The decrease was due to the prepayment of $115.9 million of principal under three of our credit facilities, in addition to $5.4 million in scheduled debt amortization partially offset by $115 million drawn to fund the acquisitions of the four dropdown vessels delivered so far. Overall, our balance sheet remains strong with a net debt to cap of 30.8% and with partner's capital representing 60% of our total assets.

Turning to Slide 6, you can see our fleet drydock schedule. Over the last 12 months, we drydocked a total of 10 vessels in certain cases earlier than initially scheduled due to certain employment opportunities such as the Petrobras business and in anticipation of certain regulatory requirements.

Total off hire for 2015 amounted to 192 days and total expense costs for the 10 drydocks amounted to $3.5 million. We expect an additional five of our vessels that went to drydock in 2016 including two MR product tankers, which have concluded their drydocking earlier this month. We currently have no scheduled drydocks for 2017.

Turning to Slide 7, we are pleased to have secured new time charter employment and extended period contracts for a total of five of our product tankers during the quarter at an average [increase] [ph] of $2,268 per day as the Partnership continues to take advantage of the current favorable rate environment in the product tanker market.

Moreover, the employment of three of our product tankers for a period of three years with two vessels to Petrobras and one to Flopec is a further important step in securing customer visibility at increased rates.

In this respect, it is important to note that for 16 of our vessels fixed year to date, we have secured employment for two years or longer. In addition, by the time that all vessels have commenced their new employment, the number of vessels employed to Capital Maritime will have decreased substantially compared to a year ago.

At the end of 2014, 12 of our vessels were employed with Capital Maritime out of a total fleet of 30 vessels compared to five out of 34 vessels currently in our fleet. Thereby reducing our exposure to Capital Maritime and further diversifying our customer base.

Moving to Slide 8 and taking into account the new charters. The average remaining charter duration is 6.4 years. We have two product tankers and two Suezmax tankers that we will see their present charters expire over the next 12 months. We expect to continue to take advantage of the attractive fundamentals of the product and crude tanker market to secure favorable period employment for these vessels.

In addition, we are in advanced discussions with an operator for the employment of the two container vessels that are currently idle for one plus one years. Subject to final agreement on terms, we expect the charters to commence the second quarter of 2016 with a charter rate for the first year of employment expected at significantly lower levels compared to their previous charters.

However, securing employment for these two container vessels will provide the customer visibility through these difficult parts in the container market and relatively short duration of this charters would allow – will allow us to capitalize on a potential container market improvements down the line.

Turning to Slide 9, I would like to remind you that we have currently remaining commitments to acquire an Eco 9000 TEU Post-Panamax container with a five-year charter to CMA, CGM. The delivery of the last dropdown vessel is expected in February 2015 and is fully funded with cash from the balance sheet and on an existing credit facility. Among other growth opportunities from our Sponsor and the second hand market, we have been granted the right of first refusal on 8 Eco MR Product Tankers, which are currently controlled by Capital Maritime.

Capital Maritime has secured over the course of the fourth quarter 2015 and credit facility for the financing of five of these vessels which provides the option for the potential dropdown of any of these five MRs to CPLP at the 50% loan-to-value provided that these vessels have employment for two years or longer.

Now turning to Slide 10, we will review the product tanker market developments in the fourth quarter of 2015. MR product tanker spot rates weakened in the fourth quarter of 2015 compared to the previous quarter and remained overall at firm levels. In the Western Hemisphere rates were under pressure in the beginning of the quarter as the end of the driving season in the U.S. refinery maintenance and lack of arbitrage trades across the Atlantic reduced chartering activity.

A similar downward trend was observed East of Suez, as Asian refinery utilization declined on the back of refinery maintenance, which resulted in lower product exports and subsequently softer demand for product tankers. As the quarter progressed, however rates gradually improved due to the upturn in refinery utilization in the U.S. Gulf which, in conjunction with long transit delays in the Panama Canal, resulted in higher rates. At the same time, stronger naphtha flows exerted upwards pressure on spot rates in the East.

Overall, in 2015, the product tanker spot market has been the strongest since 2007, primarily driven by the Middle East and refinery expansion and the lower oil price environment. Accordingly, the product tanker period market remained active during the fourth quarter with rates close to seven-year highs. Favorable demand supply dynamics are expected to support period rates and activity going forward. As product tanker deadweight demand is projected to grow by 3.6% in 2015 while new contracted activity has been limited.

The order book for medium-range product tankers has declined notably from the start of 2015. And currently stands at 13.3% as a percentage of the current fleet. Concurrently the order book continues to experience substantial seepage during 2015 as approximately 32% of the expected MR and handy size tanker newbuildings were not delivered on schedule.

Turning to Slide 11, the fourth quarter of 2015 was the best quarter in terms of spot Suezmax earnings since 2008. The market was supported by strong Chinese and European demand. In particular, China's crude oil imports hit a record of $7.8 million per day in December, as the country continues to take advantage of the low oil prices to build its Strategic Petroleum Reserves.

Suezmax tankers also benefited from limited tonnage availability due to increased delays in the Turkish Straits and high chartering volumes that significantly increased waiting times at several ports in the East. As a result of the firm spot market, we saw higher period activity for Suezmax tankers during the quarter, while period rates remained in line with the previous quarter, but with more charters willing to look at periods longer than 12 months.

According to the IEA world oil demand has grown by 1.8 million barrels per day in 2015, and is expected to increase at the slower pace for 2016 at 1.2 million barrels per day. Industry analysts expect Suezmax tanker deadweight demand to expand by 3% for 2016 on the back of the low oil price environment robust European seaborne crude oil import growth and increased crude exports from the Middle Eastern Gulf to India and the Mediterranean.

The Suezmax tanker order book through 2019 corresponds to 21.4% of the current fleet. However slippage was substantial for 2015 as 38% of the expected deliveries failed to materialize.

Moving to Slide 12, sentiment in the container markets remains weak as activity and rates in the fourth quarter of 2015 continued at subdued levels. Low level of cargo bookings on the Far East-Europe trades that partially reflect economic challenges in the Eurozone and commodity exporting countries in conjunction with slowing Chinese economic growth have negatively affected demand for containerized goods on the number of routes.

As a result it is estimated that volumes on the westbound Far East-Europe service contracted in the first 11 months of 2015 by 4.3% year-on-year. On the other hand the Intra-Asian trade volumes are estimated to have expanded for the full-year 2015 by 3.1%, as opposed to the 6% growth experienced in 2014. Given the persistent weakness in the market over the last few months the idle container fleet increased to 6.8% at the end of 2015 to a total of approximately 1.4 million TEU.

Supply demand balance looks a set to gradually improve in 2016. Specifically, container vessel demand is forecast to grow by 4% in 2016, while container fleet growth is expected to grow at the same pace. Furthermore the container order book corresponds to 19% as a percentage of the fleet, the lowest since 2003, but very large [smoke-ships] deliveries are projected to remain strong this year.

As a result of the depressed container market inquiry for our two Post-Panamax container vessel was limited with only few similar vessels having been fixed recently for a shorter period at a substantially reduced day rates. Catalyst for a sustained market recovery in the short to medium-term for the Post-Panamax sector include improvement in European demand and to lesser extent Intra-Asia trade.

Cascading for Post-Panamaxes into the sub 6,000 TEU range increased demolition of older vessels and the opening of a new Panama Canal locks could generate additional demand for Post-Panamaxes in the Trans-Pacific trade. As a final point I would like to highlight that we have concluded a number of important milestones in 2015 for the Partnership as we successfully executed against our business model.

Firstly, we delivered on our growth strategy by acquiring four new vessels all with long-term charters attached. We are on track to acquired the last contracted dropdown vessel in the first quarter of 2016, which is fully funded from previously completed equity offerings and then existing trade facility.

Secondly, we finished the year with a stronger balance sheet having repaid approximately 121.3 million of debt throughout 2015. Thirdly, we have taken advantaged of the strong fundamentals of all product and crude tanker market to renew a number of our charters at higher levels and in most cases for longer duration thus providing our unit holders with more cash flow visibility. At the same time we have diversified our customer base with the addition of among others Petrobras, Repsol, Stena Bulk, Shell and Flopec.

We continue to monitor the slowdown in certain key routes of the container market at a time of increased supply of container vessels, which has negatively affected container charter rates and asset values, as well as the heavy ordering for crude tanker vessels in 2015. However, all but two of our container vessels come up for re-chartering after 2020. I discussed earlier the Partnership has access to a number of dropdown opportunities from a Sponsor.

Looking ahead, our ability to grow through such dropdown opportunities and to maintain a strong balance sheet will depend on, among other things, the Partnership's continuous access to the financial markets. In view of the severe pricing dislocation that has affected publicly traded master limited partnerships, our Board believes that the Partnership is best served by maintaining the unit distribution for the quarter at $0.2385, which is unchanged from the third quarter of 2015.

And with that, I’m happy to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you very much indeed sir. [Operator instructions] Your first question from Evercore comes from the line of Jon Chappell. Your line is now open.

Jonathan Chappell

Thank you. Good afternoon, Jerry.

Jerry Kalogiratos

Hi Jon.

Jonathan Chappell

Just a couple of quick questions for you. First, on the container ships, obviously you are in discussions right now so I want to ask you about that specifically, but I’m just trying to figure out in a pretty opaque market, what the time charter and spot rate environment is like today and you have this little table on page 12, but there is no 8000 TEU line in there. So just generally speaking, where is the one to three-year time charter rates for those size ships and where would the spot market be roughly if you had to employ the ships there?

Jerry Kalogiratos

Right now Jon, there is very limited liquidity to the Post-Panamax container market. There are number of idle vessels. I think right now we count 12 vessel similar to ours as liners have taken a step back since the sharp drop in freight rates for containers a quarter or so ago. But there have been a limited number of fixtures for a shorter duration, let's call it six months to 12 months and most of them have been between the $7,000 to $10,000 range.

Jonathan Chappell

All right. And then hate to do the worst case scenario here, but assume that the negotiations fall through and they do not get chartered and you basically have the option of putting them on the spot market, which is probably does not have very good utilization right now. What’s the market like to potentially sell those ships and is that something you'd consider. I mean they are still relatively modern; the charter with Maersk, which is obviously a Blue Chip charter. So I’m sure they are in good shape. Do you think you could liquidate those if they didn't really kind of fit your strategy of being chartered on a medium-term basis?

Jerry Kalogiratos

There is no such thing as you know as a spot market, but we are quite confident that our discussions will be fruitful and we should be able to disclose more as soon as this are firm, but for the same reasons that the charter market is illiquid, it is exactly the same for the secondhand market.

So there is very little interest as I think both liners as well as owners are trying to understand what the expectations are going forward and what would be the signs for market improvement. But as I said, I think we’re quite confident that we should be able to deliver on employment let's say from the second quarter onwards.

Jonathan Chappell

Great. Last one and then I’ll turn it over. I completely understand the decision to keep the distribution flat given the 20% plus yield right now. Is there a – like a target yield or something where you would revisit that kind of slow and steady growth that you were on the pace you were at before, like $0.002 a quarter. Yes, that’s basically – is there a certain level you would want to get to before you kind of revisit that or right now you are just not getting paid for the yield, so retain the excess cash?

Jerry Kalogiratos

Yes, you are right, Jon. I think our Board has decided to maintain the same distribution level for this quarter and we do believe that this distribution level is consistent with our coverage. Now, our cost of capital has been currently impacted by the negative sentiment affecting generally the MLP sector, but as you know our underlying business is sound. In our view the pricing dislocation affecting the MLP sector is primarily related to low and volatile oil prices, but low oil prices have generally benefited our business and especially the product and crude tanker segments.

Now during the last few quarters, we have taken advantage of the improved tanker markets to re-charter our tanker fleet at higher rates as per the earlier announcements and now our charter duration stands at 90% for 2016 and 70% for 2017. And thus I think we’re providing long-term customer visibility.

Now in addition, as you know CPLP does not have any unfunded CapEx. So we will be reaching out to our investors over the coming weeks and quarters to explain the distinctive nature of our operations. And we expect that these mispricing will reverse as markets stabilize in the future, we can then revisit the distribution.

Jonathan Chappell

Okay, great. Thanks for your time Jerry.

Jerry Kalogiratos

Thank you, Jon.

Operator

So your next question from Stifel comes from the line of Ben Nolan, and your line is now open.

Benjamin Nolan

Thank you. Hi Jerry. I have a couple of questions. First relates to the charters and the five new charters that you sign all of which are really good. The question there relates to the Sponsor chartering if you - I was just curious how you are thinking about, obviously you are able to get charters from other entities during the quarter and I would imagine there is a relatively fluid market. How do you think about incremental charters whether to do those internally or charter the amount to other unaffiliated third parties, what’s the thinking on that?

Jerry Kalogiratos

Hi Ben. I think the answer is that it depends on the opportunity at hand, but to the extent possible we have reduced our exposure to Capital Maritime as we discussed earlier. We expect by the time we deliver all the ships to their new charters we’ll have only five ships to Capital Maritime. This is I think very different compared to the employment of our vessels a year or so ago.

But Capital Maritime remains very active in the spot market, it always gets a chance to bid when there is unemployment opportunity for one of our vessels and depending on the position and rate it has been at times a very competitive, more competitive than what we see on offer from third-parties. But I do remind you that all decisions when it comes to such transactions are taken by the independent Conflicts Committee.

Benjamin Nolan

And clearly the charter rates are fair to even better than that, but my next question sort of relates to the nine vessels that you show in terms of potential dropdowns there obviously nothing imminent, but as we get closer to the delivery of that first vessel in September. First of all I don’t know if there are any charters on those vessels, but just thinking through what you might do with those in the event that the capital markets are currently or unavailable as they currently would appear to be. I mean is that – is there any compulsion to need to feel like you do some dropdown or is it possible that just nothing happens with those?

Jerry Kalogiratos

Ben, at this point we are more focused on taking delivery of the last contracted dropdown vessel which we expect to take delivery of in towards the end of February. The additional dropdowns such as 8 MRs that you are referring to is only an option and of course Capital Maritime will needs to line up it employment for those and for us to consider.

As you saw in our presentation Capital Maritime has secured the credit facility that can be used for this purpose and effectively the credit facility allows for a dropdown on 50% LTV for up to 5 of these MRs, but as you say we need to see our unit price appreciate considerably from current levels before we can contemplate growth and accretive transactions that would involve financing with common equity.

The current dislocation of pricing in the wider MLP space means that their cost of capital has increased substantially with our common units yielding today close to 22%. So to answer your question Capital Maritime continue to trade the vessels; there is definitely no obligation from our part or we don't feel that there is an obligation from our part to drop down the vessels and definitely not at this valuation.

Benjamin Nolan

Got you. And then lastly and this hopefully will not be an important long-term issue but with respect to the two vessels, the two containerships that currently are unemployed and you hope to have employment for in the second quarter, which I think would be very important. How should I think about the operating expenses on those I mean or for the first quarter at least, are they still costing as much as they would otherwise if they were running?

Jerry Kalogiratos

There is a small reduction in the operating expenses because the number of crew - we have decreased the number of crew on board and of course as the vessels they are not trading and the main engine is not being utilized, the consumption of lubricants is lower. So there might be a saving of call it 20% to 30%, but we have not laid out the vessels because we have been seeing inquiries from liners limited inquiries and now as already discussed we think that we are very close to actually fixing something. So you should expect a small reduction but not a major one.

Benjamin Nolan

Okay. That's very helpful. Thanks Jerry and good luck getting those two last contracts.

Jerry Kalogiratos

Thank you, Ben.

Operator

Thank you very much, sir. And we do have Ken Hoexter back with us. So from Bank of America your next question comes from Ken Hoexter. Your line is open sir.

Ken Hoexter

Great good morning sorry about that Jerry apologize. Thank you, operator for coming back. Jerry on the order book you mentioned the large slippage earlier, but given the oil pullback is there an even greater reluctance to take Eco ships, so could we see that do you see that slipping even further what you think the feel is in the industry and then and also within that. Can you talk about the new regulations that are coming up on the Tier-3 does that keep the orders going or does that only on new vessels and you don't have to upgrade the old ones may be you can just talk a little bit about the regulatory environment there?

Jerry Kalogiratos

Sure. Overall for - when it comes to tankers you’ll find that for product tankers the ordering was quite subdued compared to previous years with the order book looking a very reasonable 15% one of the lowest we have seen for some years. On the crude tanker side don’t forget that for many years until 2014 because of the depressed market there have been virtually no orders.

So when the markets are top on the back of the lower oil prices, which generated incremental oil demand as well as because of the limited supply and we did see a number of orders being placed so over the last let's say 18 months. And this trend has definitely – is definitely weaker as we speak as I think we have seen the bulk of ordering, but at the same time this means that the for example when it comes to Suezmax the order book is around 20%.

When it comes to the demand I think that it should be able to absorb the supply as Chinese demand continues to be robust and it's not just correlated to economic growth it's also correlated to exports coming out of China, when it comes to products as you might know. China has increased the quotas for Chinese refineries including teapot refineries.

So China has been importing, consistently importing over the last few months. And the building of strategic reserves seems to continue. In addition the incremental oil demand that seems to be driving the crude oil demand going forward and the return of Iran to the market as well as the potential of U.S. exports could play very much in favor of crude vessels.

But to return to your question the Tier-3 regulation is only for vessels that have been ordered from – I think actually [delayed] from January 2016 onwards. So it does not affect the older vessels. Of course demand for Eco vessels or rather the benefit of Eco vessels is less today with the bunker prices around $150, $160 per ton. But in the end there is – the economics are specific for each type of vessel and depending on the consumption of a ship you know your return. So Eco vessels, they still come under a premium, but it's simply much smaller.

Ken Hoexter

I appreciate that answer and you kind of blended in there a little bit into my next question which on the export band. I mean I think the general thesis seems to be that hey it’s good for oil tankers; we’re going to get more stuff moving and same with Iran. But the theme seems to be – it’s bad for product tankers, because now you are going to have shorter hauls. What have you seen I mean obviously have you seen the pressure on rates I mean I know we’re just starting and what are your thoughts I guess generally as we move with that with the lifting of the band is, do you see that as a negative on the product side?

Jerry Kalogiratos

The product tanker market has been – the spot market has been a little softer in the first quarter of 2016 compared to last year, but don't forget that with the exception of the recent cold spell at your side of the wood say it has been a very warm winter.

So demand for middle [dislets] has been weaker over the last few weeks. I think we need to be – we need to see how things develop going forward especially over the coming weeks with regard to product tanker demand. Now it is not clear how the U.S. crude oil exports will affect the demand for product tankers.

But what I can say is that I do not foresee a very hot crude market without a very good product tanker market and vice versa. As you know they are vessels that can trade both sides of the trade. So if for example the crude tanker market on the back of the Iranian crude oil and the experts out of the U.S. out of the U.S. pickup and while the – for example the product tanker market is very subdued then you will see a lot of relatives moving into that market as we have seen already and vice versa. So I think it was going to be a net positive for tankers for these developments, but we just need to see how this will develop going forward.

Ken Hoexter

Wonderful. Appreciate the answers and congrats on the nice uptick on the renewal rates. Thanks Jerry.

Jerry Kalogiratos

Thank you.

Operator

Thank you very much sir. Now from Deutsche Bank, your next question comes from the line of Amit Mehrotra and your line is now open sir.

Unidentified Analyst

Thank you. This is [indiscernible] in for Amit. I don't think you actually need to recharter those containerships to be able to maintain the coverage given the accretive tanker rechartering and dropdown. So if you could talk about this in terms of cash flow puts and takes even without any revenue contribution from the containerships and all the OpEx associated with those ships that would be great?

Jerry Kalogiratos

You are right. Actually, we don't need to employ these vessels at all for the full-year and still we can deliver let's say a coverage on the existing distribution north of one times. But as you say the – we have rechartered a number of our product tankers and increased rates and a number of our – actually these vessels were not the charters, we’re not expiring this year, but Capital Maritime was willing to let go and as such we managed to extend our remaining charter duration and increase our coverage and increase rates.

And in the end depressed container market affects only two out of the 35 ships. So, yes, the answer is yes, we can still achieve one times coverage even without these vessels being employed, but we do feel quite confident that we will secure employment for both ships.

Unidentified Analyst

Great, thank you for that. You’ve also noticed that net debt to capital took down even further in the quarter and the Partner's distribution yield is significantly higher than cost of any debt financing. I know it's a long-shot, but any chance of putting on a little more debt in using the proceeds to repurchase shares?

Jerry Kalogiratos

I think for the moment it is important for us to take delivery of the last dropdown vessel and also fix the two container market to open container vessel, so that are currently idle. Capital markets normalize and then we will consider other transactions into the unit buybacks I think is still too early.

Unidentified Analyst

Okay, very good. And one last question. Just regarding the container ship side of the business, how many Post-Panamax ships are currently seeking an employment and in addition how many 8000 TEU vessels are coming up charter or being redelivered this coming year. We are just trying to get an understanding of challenging the market is getting on a prospective basis?

Jerry Kalogiratos

Currently, we have counted 12, 8000 TEUs vessels which are similar to ours being idle, but from shipping companies, companies like us and that's in addition to a number of similar vessels controlled by liners. But the market is quite opaque so it's difficult to give you the exact number of vessels especially those controlled by liners that are app for rechartering sooner or already idle.

But it’s important to note that when a requirement arises it could well be that it will be for more than one vessel especially for liner decides to replace to service our smaller ships. For example, if the liner decides to replace a string of 6500 TEUs with a new string of 8000 TEUs you could see a number of these vessels finding employment. So it's not one by one kind of employment. And we have been seeing a few such inquiries coming to the market.

Unidentified Analyst

Very good. Thank you. That’s all from us. Definitely appreciate the time guys.

Jerry Kalogiratos

Thank you.

Operator

Thank you very much indeed. Your next question from UBS Securities comes from the line of Spiro Dounis. And you line is now open.

Spiro Dounis

Hi Jerry, how it’s going.

Jerry Kalogiratos

Nice Spiro, [indiscernible].

Spiro Dounis

Good, good not bad. So just wanted to go back to something you said just previously I mean you mentioned buybacks and it sounds like your coverage is going to be going up a little bit, the vessels coming online, the distribution flat lining for now. Just wondering how you are thinking about that use of cash if it’s going to unit buybacks, how big would you see something like that being?

Jerry Kalogiratos

I think at this point it’s very important for the partnership to be conservative with its cost especially we don’t have visibility on the container market and until the container market improves as well as to see capital markets normalize. So in addition to that we do have $15 million of debt amortization per year, so – and we're going to use the excess cash to repay that debt.

Spiro Dounis

Okay. And I guess I realize some of this is sort of speculative, but if you were to build up a pretty nice cash balance over time just because the market is doing well and maybe don’t reinstate the growth as soon as you think. These dropdowns that you have in place, is there a way or would you be open to sell funding of those with cash on hand not having to that capital market and maybe one at a time as supposed to all eight?

Jerry Kalogiratos

Potentially yes, let us raise that point whereby we have visibility with the containers as well as with capital markets and then yes that could be a potential way of funding dropdowns.

Spiro Dounis

Okay. And just to be clear is there an expiration on your options to take those?

Jerry Kalogiratos

No, there is none. I mean they weighted this works is that if Capital Maritime has been offered from a third-party to sell the vessels then we have right of first refusal [indiscernible].

Spiro Dounis

Perfect. That’s from me. Thanks Jerry.

Jerry Kalogiratos

Thank you, Spiro.

Operator

Thank you very much indeed. So I’ll move to the next question from Seaport Global Securities your next question comes from the line of Sunil Sibal. And your line is now open.

Sunil Sibal

Hi, Jerry congratulations on a good quarter.

Jerry Kalogiratos

Thanks.

Sunil Sibal

Most of my questions actually been addressed just a couple of clarifications. So on the containership the two vessels that you are bidding on are the two bids or discussions the same charter or they are a bit different charter?

Jerry Kalogiratos

They will both go to the same charter.

Sunil Sibal

Okay. That’s helpful. And then on in terms of the capital market have you seen some kind of Midstream MLP players come in and cap into alternate MLP currency, i.e. preferred lot. I was just kind of curious if you kind of explore that market or how do you see that market for yourself or in the broader space of shipping MLPs?

Jerry Kalogiratos

Well, we have issued preferred in the past and half of it has been converted to common if there is an opportunity and whereby we can put together an accretive transaction, yes we would look at that source of capital as well.

Sunil Sibal

Is it fair to say that they are not there yet, right?

Jerry Kalogiratos

Sorry what’s that Sunil?

Sunil Sibal

I was saying that it’s fair to assume that we are not there yet in terms of that market being deep enough for you guys to explore something in the near-term?

Jerry Kalogiratos

Not at this point as far as we know but it is something that we have used before and we bear in mind.

Sunil Sibal

All right. That’s all I had. Thanks much guys.

Jerry Kalogiratos

Thank you, Sunil.

Operator

Thank you very much indeed sir. Now from the company name of Janney we have a question from the line of Michael Gyure. I hope I have said your name correctly Mike. Thank you.

Michael Gyure

Yes, that’s fine. Thank you. I wondered Jerry if you could talk a little bit what you are seeing on the operating cost side maybe talk a little about your utilization days trends kind of fourth quarter to first quarter. Anything you can give me there would be helpful thanks.

Jerry Kalogiratos

Well, our utilization was close to 100% for the vessels that did not have any drydocks or for that quarter. As discussed earlier, we did have a number of higher days for the vessels at the drydock throughout 2015, including for three of our vessels that drydocked in the fourth quarter of 2015. That was effectively for the Archimidis, the Agamemnon, and the Anemos I, but other than we had no other hire, OpEx is very much in line with the previous quarters. And if anything for the vessels that past drydock you should expect slightly lower OpEx.

Michael Gyure

Great, thank you.

Operator

Thank you very much indeed. And your next question from Raymond James comes from the line of Ben Brownlow. Your line is open sir.

Benjamin Brownlow

Hey, thanks for taking the question and congratulations again on the renewed vessels. Jerry, I think you said earlier in the call on the containerships was it a one-year time charter that they were considering plus a one-year extension?

Jerry Kalogiratos

Yes, that’s correct Ben. So what we are discussing is one plus one in structural – in charters option, but you should expect that second year would be at an increased rate.

Benjamin Brownlow

Is there any color you can provide on what the second-year rate would look like?

Jerry Kalogiratos

It would be let’s say closer to the average that these vessels have been earning compared to the first year, but it's important to note here that its charters option, so it is the first year that is firm. If market improves considerably then the charters will exercise that option, if it doesn't then you're left with one-year at the low rate.

Benjamin Brownlow

That’s helpful. And then I just want to get your thoughts in terms of what you view as sort of what’s going to be the inflection point to a rate improvement in containership side or what do you see in the catalyst, I mean is it going to be a scrapping, is it going to be improved Chinese demand, just some color there?

Jerry Kalogiratos

See, I think the important things to look for when it comes to containers is an improvement in European demand and maybe to a lesser extent into Asia trade. The cascading of Post-Panamaxes into the sub 6500 TEU territory that’s as liners replace smaller containers with bigger ones, a trend that has been taking place now for a while. The demolition that you mentioned is very important and it has been picking up considerably as a percentage of the fleet is idle and we have seen 15-year old containers heading to the scrapyard.

And of course I think a major catalyst for Post-Panamax is especially the opening of the new Panama Canal locks that would mean that number of operators would choose to replace [5000, 600,000] TEU vessels with large Post-Panamax vessels.

Benjamin Brownlow

Great, thank you.

Jerry Kalogiratos

Thank you, Ben.

Operator

Thank you very much indeed. And there are no further questions I shall pass the floor back to you for closing remarks. Sorry to interrupt you. I seem Michael Webber has just rejoined the call would you like to take his questions sir.

Jerry Kalogiratos

Of course. Thank you.

Operator

Mr. Webber, would you please press star one again on your telephone keypad for me. Mr. Webber, your line is now open.

Unidentified Analyst

Hi, I’m sorry this is – I’m actually Hilary calling in for Mike.

Jerry Kalogiratos

Hi, Hillary.

Unidentified Analyst

Hi, how are you Jerry? I know you are not looking to acquire any of the optional vessels any time soon, but I was just wondering – I know they have a credit facility, but I was just wondering and your balance sheet looks really good, if you have any target leverage ratio if I guess so when you do decide to purchase those vessels?

Jerry Kalogiratos

The facility is with Capital Maritime, but it does provide the option for the vessels to be dropped down at the 50% maximum loan to value into capital products. We have I think communicated in the past that this is the ratio that we will be targeting for in the future and I think it's also very important for us to be able to secure non-amortizing debt.

Unidentified Analyst

Okay. If you have any expected timing as far as when the Sponsor will be getting charters for these vessels?

Jerry Kalogiratos

Well, the Sponsor has a large presence in the spot market, couple of those ships – actually one of the ships has longer-term employment, but no actually I don't have any color at this point.

Unidentified Analyst

Okay, that’s it from me. Thank you very much.

Jerry Kalogiratos

Thank you, Hillary.

End of Q&A

Operator

And once again I’ll pass the floor back to you. Thank you very much.

Jerry Kalogiratos

Thank you all for listening in today.

Operator

Thank you Mr. Kalogiratos. And with many thanks to our speaker today that does conclude the conference. Thank you all for participating. You may now disconnect.

Jerry Kalogiratos

Thank you, Jenny. Have a good day.

Operator

All the very best. Thank you sir.

Jerry Kalogiratos

Thanks. Bye-bye.

Operator

Bye-bye.

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